Fitch affirms Qtel at A+ outlook stable

Fitch Ratings has affirmed Qatar Telecom Q.S.Cs Qtel Long-term foreign currency Issuer Default Rating IDR at A+ with Stable Outlook. Qtel International Finance Limiteds global medium-term note programme GMTN, guaranteed by Qtel, has also been affirmed at A+.

The IDR reflects Fitchs assessment of the sovereigns creditworthiness due to Qtels strong operational and strategic ties with the State of Qatar.

The State of Qatar holds a 55% stake in Qtel, either directly or via the Qatar Investment Authority QIA. The agencys approach and top-down methodology takes into account the assumed government support in line with Parent and Subsidiary Rating Linkage Fitchs Approach to Rating Entities Within a Corporate Group Structure.

Qtels existing facilities have a significant covenant, which states that there is a prepayment requirement should the State of Qatar cease, directly or indirectly, to hold control and majority of Qtels share capital.

Leverage net debt/EBITDA declined slightly to 1.9x at 9M10 compared with 2.25x at end-2009 mainly due to the falling capex requirements in 2010. The companys consolidated FCF generation capability will be affected by increasing investment needs in Indonesia and Iraq in 2011, but as capex falls in the long term, Fitch expects that Qtel will generate more FCF. Fitch also believes that the company will maintain a conservative financial policy and will not test the maximum leverage tolerance set by the board at a debt/EBITDA ratio of 3.5x. However, the agency does not expect net debt to EBITDA to deviate from the 2.0-2.5x range, even in the worst case scenario.

More than 60% of consolidated EBITDA will originate from Qtels three core markets of Qatar, Kuwait and Indonesia in 2010. While international diversification is a key element of the current rating, Fitch cautions that exposure to country risks related to markets such as Iraq, Algeria, Tunisia and Oman, which make up 38% of group EBITDA at 2009, remains one of the main risks going forward. The agency notes that currency fluctuations may dampen revenue growth as well as operating profitability, and accessing cash from operating subsidiaries can be difficult in an adverse political environment.

Gross debt increased to $10.3bn in September 2010 but the company also has healthy cash balances of nearly $4.1bn. This is more than adequate to cover upcoming maturities in 2011 and 2012. Qtel faces $6bn refinancing requirements on a consolidated basis over 2011-2013.

63% of total debt is located at the parent level in the form of bonds, term loans and other revolving credit facilities.

If the State of Qatar reduces directly or indirectly its control and majority holding of Qtels share capital, this would have a negative impact on the companys rating. Fitch will also review any acquisition as an event risk, in line with its methodology. Aggressive acquisitions that breach the companys maximum net debt to an EBITDA level of 3.5x net or the failure to deleverage to below 3.5x in the short term after such an acquisition would be negative for the rating.