Fitch Ratings has affirmed Qatar Telecom Q.S.C’s (Qtel) Long-term foreign currency Issuer Default Rating (IDR) at ‘A+’ with Stable Outlook. Qtel International Finance Limited’s global medium-term Note Programme (GMTN), guaranteed by Qtel, has also been affirmed at ‘A+’.
The affirmation reflects Fitch’s assessment of the sovereign’s creditworthiness due to Qtel’s strong operational and strategic ties with the State of Qatar. The state holds a 55% stake in Qtel, either directly or via the Qatar Investment Authority (QIA) and another 13% via other government agencies; a total of 68% ownership. The agency’s approach and top-down methodology takes into account the implied government support in line with Fitch’s Parent and Subsidiary Rating Linkage criteria. The government views Qtel as a strategic asset and Fitch notes that Qtel’s international expansion is in line with the government policy to diversify Qatar’s asset base away from the energy sector.
As growth opportunities diminish in Qtel’s existing portfolio due to the near maturity of these markets as well as intensifying competitive pressures, and Qtel expands its international footprint for new growth potential, ongoing capital commitment by the State of Qatar may be required for these operating subsidiaries. Any evidence that this is not forthcoming if needed would be negative for the rating. Fitch will also review any acquisition as an event risk, in line with its methodology.
Group EBITDA margin declined to 46% in 2011 due to elevated competition in major markets and Fitch believes operating margins will be squeezed further. This may be partly compensated by cost savings and additional revenue from mobile broadband. While international diversification is a key element of the current rating, exposure to risks related to markets such as Iraq, Algeria, Tunisia and Oman (45% of group EBITDA at 9M11), remains one of the main issues. Currency fluctuations may dampen revenue growth as well as operating profitability, and access to cash at operating subsidiaries can prove tough in an adverse political environment.
Qatar Telecom Q.S.C.’s (Qtel) leverage (net debt/EBITDA) is expected to edge up to 1.8x at end-2011 compared with 1.7x at end-2010 due to dividends owed to State of Qatar for 2008-2010 and the mobile license settlement at Asiacell. Fitch is confident that the company will maintain a conservative financial policy and will not test the maximum leverage tolerance set by the board at a net debt/EBITDA ratio of 3.5x. Group gross debt increased to $12.7billion in September 2011 but the group has healthy cash balances of nearly $6.5billion. Some 73% of total debt is located at the parent level while the existing cash balance is sufficient to meet maturing debt in the next 18 months at the Qtel level.
“There is a prepayment requirement should the State of Qatar cease, directly or indirectly, to hold control and majority of Qtel’s share capital. Therefore, if the State of Qatar reduces (directly or indirectly) its control and majority holding of Qtel’s share capital, this would have a negative impact on the company’s rating. Qtel’s existing facilities have a significant covenant,” Fitch in a statement, said.