Fitch Ratings has assigned Qatar-based telecoms company Ooredoo Tamweel Limited’s (SPV) upcoming trust certificate programme (Sukuk) an ‘A+(EXP)’ expected rating. The rating is in line with Ooredoo’s (A+/Stable) Long-term Issuer Default Rating (IDR) and senior unsecured rating.

The final rating is contingent upon the receipt of final documentation conforming materially to information already received and details regarding the Sukuk programme amount. Ooredoo Tamweel Limited is incorporated in the Cayman Islands solely to act as the issuer of the certificates and the trustee for the holders of the certificates.

The certificate programme’s expected rating is driven by Ooredoo’s IDR and senior unsecured rating of ‘A+’, due to the Sukuk’s structure, which includes the following features: 1) Ooredoo’s obligations under the documentation rank pari passu with its other unsecured obligations; 2) Ooredoo’s undertaking to purchase the Sukuk assets (airtime vouchers) from Ooredoo Tamweel Limited on the scheduled or any earlier dissolution dates; 3) The price payable by Ooredoo in respect of the airtime vouchers will be the sum of the aggregate face amount of the certificates then outstanding (in addition to any periodic distribution amounts that have not been paid); and 4) on any periodic distribution date, if the returns generated from the Sukuk assets are insufficient to cover the periodic distribution payments due, Ooredoo undertakes to pay further amounts to the SPV to remedy such shortfall.

By assigning such ratings to the programme and certificates to be issued under it, Fitch does not express an opinion on the programme structure’s compliance with Shariah principles or whether the relevant transaction documents are enforceable under any applicable law.

KEY RATING DRIVERS

State Support

The IDR reflects Fitch’s assessment of Ooredoo’s strong operational and strategic ties with the State of Qatar and the sovereign’s creditworthiness. The agency’s top-down approach takes into account potential government support, in line with Fitch’s Criteria Report Parent and Subsidiary Rating Linkage.

Steady but Slowing Growth

Ooredoo’s revenue continues to grow at rates in excess of western European incumbents’ but the company is also experiencing a combination of maturing mobile markets, increasing competition and changes to the technology landscape. Although the company has responded by shifting its strategy towards efficiency improvements and focusing on mobile data products, which have led to a stabilisation in operating margins, Fitch expects pressure in this area to continue over the short- to medium-term.

Emerging Market Exposure

Ooredoo generates approximately 32% of its consolidated EBITDA from its key Gulf markets of Qatar, Oman and Kuwait, the remainder being derived from Indonesia, Iraq, Algeria and Tunisia. Ooredoo’s operations in these lower-rated countries continue to generate stronger headline growth than domestic markets, but are exposed to higher political risks. Currency fluctuations and access to cash at the operating subsidiaries in some weaker-rated countries could also prove challenging under adverse political circumstances.

Controlled Financial Policy

Ooredoo’s consolidated leverage guidance is 1.5-2.5x net debt/EBITDA. While the group remained comfortably within this level at end-2012, leverage can fluctuate quite significantly within this band primarily due to large-scale M&A activity. However, should the group breach these levels and struggle to deleverage within a short forecast period (12 months), Fitch believes equity support from the State of Qatar would be forthcoming.

M&A Risk

Large majority-controlled acquisitions of telecom companies with solid market positions in MENA and Asia-Pacific cannot be ruled out as happened, for example, with its withdrawal from the Maroc Telecom bid process. These are generally quite expensive and can lead to a significant increase in leverage. Fitch continues to treat any acquisition as event risk, in line with its methodology.

Myanmar Licence Award

The license recently awarded in Myanmar is unlikely to have an impact on the ratings, based on Fitch’s estimates of USD2.5bn-3bn of capex over the next three years. In Fitch’s view, current estimates suggest this new investment has no implications for the implied support of or commitment from the State of Qatar.

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:

-As government support is factored into the ratings, upside potential is limited, but any positive change in the sovereign rating would have an impact on Ooredoo’s rating.

Negative: Future developments that could lead to negative rating action include:

-As growth opportunities diminish in Ooredoo’s existing portfolio and competitive pressures intensify, and as Ooredoo expands its international footprint, capital commitment from the State of Qatar may be called upon. Any evidence that this would not be forthcoming would be negative for the ratings.

-Aggressive acquisitions that breach the company’s maximum net debt/EBITDA level of 1.5-2.5x would be negative for the ratings.