September 11, 2017 / 9:35 AM / 2 months ago

Fitch Downgrades Ooredoo to 'A'; Outlook Negative

(The following statement was released by the rating agency) LONDON/DUBAI, September 11 (Fitch) Fitch Ratings has downgraded Ooredoo Q.S.P.C.'s Long-Term Issuer Default Rating (IDR) to 'A' from 'A+' and removed it from Rating Watch Negative (RWN) where it was placed in June 2017. The Outlook on the IDR is Negative. A full list of rating actions is available at the end of this commentary. This rating action follows that on Qatar's sovereign rating in August 2017 when Fitch downgraded Qatar's Long-Term Foreign- and Local-Currency IDRs to 'AA-' from 'AA', and removed them from RWN. The Outlook on the IDRs is Negative. We believe the links between the state and Ooredoo should remain strong, despite the macroeconomic challenges facing Qatar. Hence, Ooredoo's ratings are two notches lower than Qatar's sovereign rating, in accordance with Fitch's parent and subsidiary rating linkage methodology. Qatar directly and indirectly owns 68% of Ooredoo. KEY RATING DRIVERS State Support: Fitch applies its parent and subsidiary rating linkage methodology in rating Ooredoo. The ratings reflect Ooredoo's strong operational and strategic ties with Qatar. Legal ties are underpinned by the presence of a change of control covenant in Ooredoo's financing documentation should Qatar cease to control the group. This implied state support underpins the strong rating and offsets risks associated with the company's diversification into weaker-rated emerging markets, slowing sector growth, and M&A. Domestic Market May Slow: Ooredoo generated approximately 25% of its consolidated revenue in 1H17 (and 29% of EBITDA) from Qatar and we expect the contribution from the domestic business to remain significant in the coming years. Domestic revenue and EBITDA may weaken, due to a weaker economic environment amid current political challenges, and as competitive pressure continues. Good 1H17 Results: Ooredoo reported strong 1H17 results with consolidated revenue up 2% and EBITDA up 7%, which included a 1pp drag from negative FX impact on both revenue and EBITDA growth. Free cash flow (as defined by Ooredoo) has improved over the past 12 months as capex has declined with management optimising the company's network investments. Emerging-Market Exposure: Emerging-market risks have abated slightly as operational performance has improved, even though there are still FX fluctuations in some key markets. The financial performance of Ooredoo's operations in Indonesia (25% of 1H17 consolidated revenue) has been strong in 2016 and 1H17, while in Iraq (13% of 1H17 revenue), 1H17 revenue grew slightly after a period of decline and EBITDA margin is stable at around 45%. Conservative Leverage Profile Likely: Ooredoo's reported consolidated net debt/EBITDA at the end of 2Q17 at 1.9x, a reduction from 2.0x at the end of 2016, and well within the company's target of 1.5x-2.5x. Weakness in the domestic business due to macroeconomic conditions may reduce the pace of deleveraging over the next few years. In the unlikely event of an acquisition, leverage may increase significantly, However, we believe that if the group exceeds its target leverage range and struggles to deleverage within the subsequent 18-24 months, forthcoming equity support from Qatar should help reduce debt and place leverage on a more stable footing. Sukuk: We have reviewed Ooredoo's Sukuk documentation, structure, terms and conditions and there has been no material change since the certificate programme was assigned its rating of 'A+' in December 2013. For more information, see the rating action commentary 'Fitch Rates Ooredoo Tamweel's USD1.25 billion Sukuk 'A+'', December 2013. DERIVATION SUMMARY Ooredoo is the leading telecoms operator in Qatar, with operations in the Middle East, south-east Asia and North Africa. The ratings reflect the continued strength of Ooredoo's links with the state of Qatar. Ooredoo's ratings are two notches lower than Qatar's sovereign rating, in accordance with Fitch's parent and subsidiary rating linkage methodology. Qatar directly and indirectly owns 68% of Ooredoo. This notching is similar to how Etisalat (A+/Stable) is rated two notches lower than Abu Dhabi's 'AA'/Stable sovereign rating, where we assess Etisalat also has strong government support. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - low single-digit growth in revenues for 2017 and average 1.2% growth for 2018-2020; - lower yet stable EBITDA margin at 39%-40% for the forecast period; - no change in implied support from the state of Qatar; - generally lower capex to sales ratio for the forecast period, mainly financed internally. RATING SENSITIVITIES Ooredoo Q.P.S.C. Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Explicit guarantees from Qatar in favour of Ooredoo, which would probably result in positive rating action on Ooredoo's IDR, providing that the other parent-subsidiary linkages do not weaken - Positive rating action on Qatar Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - A downgrade of the sovereign rating or a change in implied support and commitment from, as well as importance to and ownership by Qatar, which would prompt a review of the ratings - Significant acquisitions that breach the company's maximum net debt/EBITDA of 2.5x without deleveraging below that level within 18-24 months, indicating weaker state support Sovereign Rating Sensitivities The Main Factors That Could, Individually or Collectively, Lead To Negative Rating - A failure to reduce fiscal deficits or a materialisation of large contingent liabilities, placing further strain on sovereign assets - A further deterioration in Qatar's external balance sheet, for example due to continued outflows of non-resident funding - Further escalation of measures against Qatar The Outlook is Negative. Consequently, Fitch does not currently anticipate developments with a high likelihood of leading to an upgrade. However, future developments that could, individually or collectively, lead to positive rating action are: - a return to fiscal surpluses, for example due to sustained higher hydrocarbon prices, spending cuts or measures to raise non-oil revenue; - an improvement in Qatar's external balance sheet; - normalisation of Qatar's external relations. LIQUIDITY Balanced Debt Maturity Profile: Ooredoo does not have significant maturities for the remainder of 2017 and has the maturing sukuk payment of USD1.25 billion in 2018, which is likely to be refinanced by another instrument. Liquidity remains ample as of 1H17 with QAR3 billion in an unutilised RCF and a consolidated cash balance of QAR16.5 billion, sufficient to meet mid-term cash flow needs. FULL LIST OF RATING ACTIONS Ooredoo Q.S.P.C. -- Long-Term IDR downgraded to 'A' from 'A+'; RWN removed; Outlook Negative Ooredoo International Finance Limited -- Global medium-term note programme USD5 billion listed on the Irish stock exchange and notes under the programme: senior unsecured downgraded to 'A' from 'A+'; RWN removed --Global medium-term note programme USD5 billion listed on the London stock exchange and notes under the programme: senior unsecured rating assigned at 'A' Ooredoo Tamweel Limited -- Sukuk notes issued under the programme: senior unsecured downgraded to 'A' from 'A+'; RWN removed Contact: Principal Analyst Samer Haydar Associate Director +971 4 424 1240 Supervisory Analyst Damien Chew, CFA Senior Director +44 20 3530 1424 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Stuart Reid Senior Director +44 20 3530 1085 Click here to enter text. Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Sukuk Rating Criteria (pub. 14 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy 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 WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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