QATAR. Standard & Poor's Ratings Services said today that it had affirmed its 'A/A-1' long- and short-term corporate credit ratings on incumbent fixed-line and mobile telecommunications operator Qatar Telecom (Qtel) Q.S.C.. The outlook is stable.
The affirmation reflects our view that the Qtel's increased adjusted debt leverage should remain compatible with the ratings, as we expect the company will focus on maximizing its cash flow generation in 2012, while taking advantage of the growth potential of its large portfolio of assets in emerging markets.
It is also based on our expectation that Qtel will prudently manage its finances, and will not pursue sizable nonorganic growth opportunities, and thus avoiding a further increase of leverage.
We base our ratings on Qtel on the company's stand-alone credit profile (SACP), which we assess at 'bbb', as well as on our opinion that there is a "high" likelihood that the government of Qatar would provide timely and sufficient extraordinary support to Qtel in the event of financial distress.
We consider Qtel to be a government-related entity (GRE). In accordance with our criteria for GREs, our view of a "high" likelihood of extraordinary government support is based on our assessment of Qtel's:
•"Important" role for the government, given its position as the largest telecoms services provider in the country. Qtel represents a key part the communications infrastructure of Qatar (AA/Stable/A-1+) and is a flagship company for the state. It contributes to the diversification of Qatar's economy away from the petrochemicals industry.
•"Very strong" link with the government, considering the state's 68% shareholding in the company, appointment of board members, and oversight of decision-making processes, particularly those related to potential investments outside the country.
Qtel's SACP is supported, in our view, by the company's dominant market position and strong operating cash flow generation in fixed-line and mobile telephony in the Qatari telecoms market. Ratings support also comes from international diversification in 17 countries.
Qtel has established operations in neighboring Gulf Cooperation Council (GCC) countries, including Kuwait (AA/Stable/A-1+) and Oman (A/Negative/A-1), and in riskier emerging markets such as Indonesia (BB+/Positive/B; ASEAN regional scale axBBB+/--/axA-2), Iraq, Algeria, and Tunisia (foreign currency BBB-/Negative/A-3; local currency BBB/Negative/A-3).
The ratings are constrained by the company's high leverage at the parent company level and its history of aggressive growth orientation to expand outside of Qatar and the GCC. Additionally, the higher end of Qtel's financial policy of consolidated net debt to EBITDA of 2.5x-3.0x would not likely be commensurate with the current ratings.
Additional ratings weaknesses include a cross-default clause with material subsidiaries in Qtel's bank loan documentation that could provide an incentive for the company to ensure that no default occurs at its large emerging-market assets, including PT Indosat Tbk. (BB/Watch Pos/NR; ASEAN regional scale 'axBBB-').
Exposure to varied country risks, significant competitive pressure outside its domestic market, and the possible effects of potential future merger and acquisition activity also weigh on the ratings.
The stable outlook reflects our expectation that QTel will maintain its Standard & Poor's-adjusted proportionate debt leverage of less than 3.0x EBITDA, helped by a robust economic performance in Qatar, growth in the emerging markets, and prudent financial management.
In our base-case scenario, we assume that Qtel will be focused on organic growth across its portfolio of assets, and will avoid sizable acquisitions that would meaningfully increase its adjusted debt.
To preserve the current ratings, Qtel has relatively limited headroom to increase leverage, and a debt increase without the capacity to reduce it to the indicated levels within the 12-month horizon would weigh on the ratings.
We might lower the ratings on Qtel if its leverage exceeds our base-case scenario expectations as a result of acquisitions or significant underperformance.
A significant reduction in the state's shareholding in Qtel and consequent reappraisal of our GRE assessment could lead to a downgrade of up to three notches, although we see this risk as remote at this stage.
We do not foresee any ratings upside at this stage, given the limited credit metrics leeway for the current rating, weak discretionary cash flow generation, and meaningful exposure to country risks.