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Rating Action:

Moody's affirms Etisalat's Aa3 ratings on acquisition of Vivendi's MT stake, stable outlook

Global Credit Research - 22 May 2014

Assigns (P)Aa3 to MTN programme

Madrid, May 22, 2014 -- Moody's Investors Service has today affirmed the Aa3 local and foreign currency long-term issuer ratings of Emirates Telecommunications Corporation Ltd (Etisalat), following the company's announcement that it closed the acquisition of Vivendi's (Baa2 stable) 53% ownership stake in Itissalat Al Maghrib (Maroc Telecom, MT) on 14 May 2014. Concurrently, Moody's has assigned a provisional (P)Aa3 rating to Etisalat's $7 billion medium-term notes (MTN) programme. The outlook remains stable.

"While we had initially suggested in guidance we provided in 2013 that the outlook on the ratings could be changed to negative given the transformational nature of this acquisition and the assumptions being made then on the expected debt incurrence, our decision to affirm the ratings with a stable outlook reflects changes to the transaction including our expectation of meaningfully lower debt incurrence at the Etisalat level," said Martin Kohlhase, a Moody's Vice President -- Senior Analyst. "We attribute this reduced debt load to the concurrent sale of Atlantique Telecom to MT for $650 million, the co-investment of the Abu Dhabi Fund for Development in the MT deal and the assumption of a low acceptance rate for the mandatory tender offer for MT's remaining shareholders."

RATINGS RATIONALE

--AFFIRMATION OF Aa3 RATINGS—

Today's affirmation factors in the three main features that materially lower the debt burden incurred by Etisalat as part of the MT acquisition. First, the sale of Etisalat's assets in French-speaking African countries to MT for $650 million moves the management of these operations to MT and thus reduces Etisalat's direct involvement with geographically more remote operations. This strategy helps reduce Etisalat's own group complexity and also focuses management's attention on large core holdings rather than smaller assets.

Second, the presence of the Abu Dhabi Fund for Development (ADFD) as a co-investor in the MT acquisition with a material contribution serves to lower Etisalat's funding requirements without incurring too much dividend leakage. As part of the transaction, ADFD will contribute $500 million of its own equity to the transaction, which provides Etisalat with an additional relief on funding needs.

Third, as part of the acquisition of the 53% stake in MT from Vivendi, Etisalat will be required to make a mandatory tender offer for remaining shareholders. As 30% of the remaining stake is held by the Government of Morocco, with the assumption that it will hold on to the shares, this leaves the free float at 17%. Moody's no longer assumes that the terms offered to remaining shareholders will lead to a significant acceptance rate, thereby further lowering Etisalat's funding burden.

Moody's also views positively the ongoing strength in Etisalat's liquidity profile post transaction. The company has obtained bank funding for the MT acquisition consisting of a three-year EUR1.05 billion loan in addition to a one-year bridge facility of EUR2.1 billion, which the company intends to take out with longer-dated capital market debt. As of 31 March 2014, Etisalat held AED18.8 billion ($5.1 billion) in cash and cash equivalents, of which only a small portion will be utilized for the transaction. Moreover, the board has adopted a much more flexible and creditor-friendly dividend policy that takes the leverage, progress of debt repayments and rating levels into account.

--ASSIGNMENT OF (P)Aa3 RATING—

The (P)Aa3 rating assigned to the MTN programme notes will be in line with Etisalat's issuer ratings, as the notes and coupons will be direct, unconditional, unsubordinated and unsecured (with the exception of obligations that will rank pari passu with all other unsecured debt of Etisalat). The notes under the MTN programme will be issued by Etisalat.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects the expectation that the integration of MT will be less transformational than initially thought and that the leverage of Etisalat will not move up to or above Moody's guidance for a downgrade.

WHAT COULD CHANGE THE RATING UP / DOWN

An upgrade of Etisalat's Aa3 ratings are unlikely as they are already amongst the highest for any rated global telecommunication service provider (e.g., Singapore Telecommunications Limited is rated Aa3 stable and Nippon Telegraph and Telephone Corporation rated Aa2 stable) and reflect the a2 baseline credit assessment (BCA) and benefit from ratings uplift from implicit sovereign support. This would hold even if Etisalat's BCA were upgraded to the equivalent of a1, although the likelihood of this is remote as the company's capital structure will be more leveraged post transaction.

Conversely, Moody's could downgrade the ratings if Etisalat's debt/EBITDA ratio exceeds 1.5x, retained cash flow/debt falls below 30% and EBITDA margins drop below 50%. A downgrade of the sovereign rating and/or lower support assumptions (e.g., through lower ownership levels) could also result in a downgrade of the rating.

The principal methodology used in this rating was the Global Telecommunications Industry published in December 2010. Other methodologies used include the Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Emirates Telecommunications Corporation Ltd (Etisalat) is the incumbent integrated telecommunication service provider in the UAE. Following market liberalisation the company has acquired stakes in telecommunication companies throughout the Middle East, Africa and Asia. Etisalat in FY 2013 generated AED 38.9 billion of revenues ($10.6bn) and an operating profit before royalty of AED14.5bn ($3.9bn). The federal government of the UAE owns 60% indirectly through the Emirates Investment Authority.

The Local Market analyst for this rating is Martin Kohlhase, 971.4.237.9544.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ivan Palacios
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

David Staples
MD - Corporate Finance
Corporate Finance Group
Telephone: 00971 4237 9536

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
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SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Etisalat's Aa3 ratings on acquisition of Vivendi's MT stake, stable outlook
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