Ringing in cash not a hard task

The impact of the credit crunch, triggered by the US subprime mortgage crisis, is not a cause for concern in the region in the short term, given the abundance of cash available mainly due to high oil and gas prices.

There is still bank financing available for big names, such as STC, Zain/MTC or Qatar Telecom obtaining revolving facilities for international expansion or mergers and acquisitions.

Given that these companies feature partial state ownership and as a result, indirect support from the state, Fitch believes that there will be a good response for high-quality deals from regional banks.

Strong international participation in bank facilities is also expected to continue. However, the days of excessive liquidity that ruled the market for the past three years are now a thing of the past.

Ultimately, the ability to secure financing will be crucial to cope with the international expansion that continues to be an underlying theme for regional telecom operators who are willing to step out of their own turf for growth opportunities in the region as well as overseas.

The leading names generate plenty of operating cash flow through their key markets, but need outside funding to pay the licence fees and capex related to global expansion.

We note that GCC countries are expected to spend an estimated $300-$500 billion on infrastructure - including telecom - in the next 10 years, and high crude prices are the main catalyst for this expansion.

It is Fitch's expectation that regional telcom companies' leverage levels are heading higher in the medium to long term as valuations remain high on a general scale.

However, the leverage levels for the leading telecom names are currently not headed to extremely high levels in spite of new licences having been awarded in Saudi Arabia and Iraq - and being awarded in Kuwait and Qatar at excessive price tags.

Leverage levels are currently reasonable, within the 1.5x-3x net debt/EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) range, for the leading names.

Furthermore, the latest acquisitions by the top five operators have been funded by the companies' operating cash flows as well as bank debt financing.

However, long-term debt financing is still in its infancy in the Middle East at this stage - Orascom Telecom is the only name that has tapped the international bond markets in the last 12 months.

The strategic investors and shareholders in the region are willing to fund new projects through capital increases, as the influx of cash is still plentiful due to rising oil prices and global liquidity.

The equity market is also a more attractive tool for financing in the region, as governments are enforcing new mobile licences to be "IPO'd" into the local equity markets within six to 12 months of the start-up of operations.

The recent IPO of Saudi Arabia's third GSM operator, Zain, is a good example indicating continued interest by investors. Fitch also reiterates its expectation that Islamic financing in the form of Murabaha facilities and the sukuk market will be in greater demand in the long term.

Consequently, Fitch expects telecom market participants to see greater activity in this field which has had healthy overall double digit growth in the past three years.

The writer is director, Fitch Ratings' EMEA Telecoms, Media and Technology group.