Etisalat assigned 'A+/A-1' ratings; outlook stable

The outlook is stable.

The ratings are supported by Etisalat's leading market position in both fixed and mobile telephony in the UAE telecoms market, despite the introduction of competition in 2007 from Emirates Integrated Telecom Co. (Du).

We expect strong population growth in the UAE to continue driving demand for telecoms services.

"Etisalat's profitability levels are very strong, with an EBITDA margin of 74.0% in the first half of 2008," said Standard & Poor's credit analyst Michael O'Brien. "The company generates strong cash flows and has good financial flexibility backed by a portfolio of growing overseas assets, the value of which has increased significantly."

The ratings also factor in implicit state support (Etisalat is 60% state owned) given that the government has not advocated a significant liberalization of the market to date and strategically assists the company in developing abroad in partnership with other UAE government-related entities.

"Standard & Poor's recognizes Etisalat's strategic importance to the state as a provider of key communications infrastructure and as a flagship national company, and the corporate credit rating includes a one-notch uplift from our stand-alone rating assessment," Mr. O'Brien added.

The ratings are constrained, however, by potential further regulatory changes, which may impair the company's domestic competitive position and market shares; possible developments include the granting of further licenses in the medium term in an environment where traditional fixed-line service revenues are stagnating or falling gradually.

In addition, a combined high percentage of profits are paid out as dividends and royalties, and this moderates financial flexibility.

Finally, there is uncertainty over the credit impact of potential future merger and acquisition activity abroad in high-growth emerging markets as part of the company's strategic goal of maintaining high growth rates.

This would likely lead to a measured increase in leverage from existing very low levels.

Although the company retains significant financial flexibility to undertake inorganic growth activities abroad, uncertainty remains over the credit impact of such actions.

We do not expect Etisalat to exceed board-approved peak leverage levels of 2.5x debt to EBITDA at any time.

In general, we expect leverage on an ongoing basis to be in the 1x-2x area or lower.

Based on the current capital structure--which includes adjusted total debt of UAE dirham Dhs10.6bn ($2.9bn)--adjusted debt to EBITDA for the 12 months to end-June 2008 was 0.6x and free operating cash flow (FOCF) to debt was 42%, contributing to modest financial risk.

A more accelerated growth plan or company transformation through acquisition--accompanied by a more aggressive financial policy or a substantial negative impact on financial performance as a result of unforeseen regulatory decisions--could negatively affect the ratings.

Upside is not anticipated at this stage, given the risks and dynamics associated with the telecoms industry and the company's willingness to increase leverage for potential foreign acquisitions.

Nevertheless, moderation in dividends or a revision of the financial policy to lower peak leverage levels could assist upside.