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Fitch Affirms Ooredoo Tunisie's National Long-Term Rating at 'AAA(tun)'; Outlook Stable
September 4, 2014 / 10:07 AM / 3 years ago

Fitch Affirms Ooredoo Tunisie's National Long-Term Rating at 'AAA(tun)'; Outlook Stable

(The following statement was released by the rating agency) LONDON, September 04 (Fitch) Fitch Ratings has affirmed Ooredoo Tunisie's (OT; previously known as Tunisiana) National Long-term rating at 'AAA(tun)' with a Stable Outlook. Fitch has also affirmed and simultaneously withdrawn OT's Long-term foreign currency Issuer Default Rating (IDR) at 'BB' and local currency IDR at 'BBB-'. These ratings have been withdrawn as they are no longer considered analytically meaningful to the agency's coverage. A full list of rating actions is below. OT underperformed Fitch's expectations in 2013 and is likely to see a further decline in EBITDA in 2014. The mobile market in Tunisia is becoming saturated (mobile penetration rate 114% 2013) and is undergoing rapid change with strong growth in 3G/data use (95% growth 2013), increases in post-paid subs (10% increase at OT in 2013) and changes in the regulatory environment. There are some similarities to what Western European mobile incumbents went through in the past decade. Increases in regulatory scrutiny, competition and a decline in tiered pricing are contributing to declines in mobile average revenue per user (ARPU). With OT's ARPU falling by 9% in 2Q14 vs 2Q13, EBITDA is set to continue to fall as a higher cost base coupled with high operating leverage further decrease the EBITDA margin. KEY RATING DRIVERS Incumbent Profile OT had a market share of around 54% in 1Q14 (both for subscribers and revenue) and continues to be the number one player in the mobile market. A large customer base, coupled with tiered voice pricing over a GSM network, allows OT to generate strong free cash flow. Fitch estimates normalised pre-dividend FCF at around 15% margin over the medium term. Challenging 2014 Operational data to 2Q14 vs 2Q13 suggest 2014 is likely to be a tough year for OT. ARPU declined by 9.7% in 2Q14 vs 2Q13, revenue declined by 5% and the total number of subscribers is up only 48,843 in the latest quarter. Declining revenues and ARPU are exacerbated by the high operating leverage employed by mobile telecom providers such as OT. This is driving the EBITDA margin below 50%, reducing normalised FCF to approximately 15% from an historical level of over 20%. One-off marketing spends, increased taxes on rebranding and employee training are expected to further compress margins in the short term. Growing Competitor Orange, the number three player, has grown rapidly this year in terms of subscribers. Orange holds a large share of net adds into 3G post-paid adds and is continuing to grow its market share in pre-paid. The emergence of a strong number three operator presents a competitive challenge to OT. While OT continues the deployment of its 3G offering, Orange established 3G in 2010 and is benefiting from being the first mover in the technology. Changing Market Regulatory changes in 2014 have led to a reduction in interconnection tariffs by 25%, hitting OT the hardest. Technological change has resulted in the rise in post-paid contracts and a move to unlimited voice and SMS contracts. This has affected OT, which has traditionally charged consumers on a tiered volume basis. A transition to data driven 3G/4G vs. voice market for mobile operators is likely to negatively affect OT, which had enjoyed a strong market share in a GSM duopoly prior to Orange's entrance into the market in 2010. Increased Leverage Funds from operations (FFO) adjusted net leverage increased to 0.37x in 2013. Fitch forecasts this will increase to 0.90x in 2014. The debt increase will be used to finance mainly a dividends, capital expenditures and mobile licenses. While starting from a low level, the increased financial leverage coupled with a deteriorating operating performance results in downward pressure on OT's credit profile. However, Fitch expects FFO adjusted leverage to fall to less than 0.5x by 2016, driven by an amortising debt profile with an average life of less than five years. Parental Support OT's 'AAA(tun)' rating incorporates a one-notch uplift from its standalone credit profile of 'AA+(tun)' due to its strategic importance to its parent - Ooredoo Q.S.C (Ooredoo, A+/Stable). In April 2014, Tunisiana SA rebranded itself as Ooredoo Tunisie, the parent's brand, giving the consumer only one brand. OT also started a contract of use of the group's services and brand, which indicates their strengthening operational ties. Furthermore, the parent continues to be the dominant shareholder and has a controlling 90% stake, with the Tunisian state holding 10%. While Ooredoo does not guarantee OT's debt, it assisted in raising TUD220m capital in 2013 and continues to be influential in North African telecoms across its various subsidiaries. Fitch considers that Ooredoo is likely to support its subsidiary as long as the parent sees equity value in the company. Reduced Liquidity, Higher Debt OT has raised debt capital, mainly to pay out a dividend in 2013 and 2014 as well as invest in mobile licenses and additional capital expenditure. This has increased interest and amortisation payments, reducing FCF expectations over the rating cycle. This is exacerbated by a lack of a committed credit facility. RATING SENSITIVITIES Future developments that could lead to negative rating action include: Weakening in the operating environment, a sharp contraction in the company's pre-dividend FCF, net FFO adjusted leverage over 1x on sustainable basis and underperformance of Fitch's expectations in 2014 could lead to negative rating action. A change in financial policy or excessive dividend distributions may also lead to negative rating action. The rating actions are as follows: National Long-term rating: affirmed at 'AAA(tun)', Outlook Stable Long-term foreign currency IDR: affirmed at 'BB', Outlook Negative; withdrawn Long-term local currency IDR: affirmed at 'BBB-', Outlook Stable; withdrawn Contact: Primary Analyst Bashar Al Natoor Director +971 44241242 Al Thuraya Tower 1 Office 1805 Dubai Media City Secondary Analyst David Weller Analyst +44 20 3 530 1643 Committee Chairperson Damien Chew Senior Director +44 20 3 530 1424 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available at Applicable criteria, 'Corporate Rating Methodology', dated 28 May 2014 and 'National Scale Ratings Criteria', dated 30 October 2013 are available at Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here National Scale Ratings Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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