TEXT-S&P cuts KPN rating to 'BBB', outlook is stable

Tue Feb 21, 2012 12:04pm EST

Overview	
     -- We think Dutch telecoms incumbent operator Koninklijke KPN N.V.'s 2012 	
EBITDA will be weaker than we had anticipated in mid-2011 because of intense 	
competition in its domestic market.	
     -- In addition, higher pension and operating lease adjustments have 	
increased the divergence between reported and Standard & Poor's adjusted debt 	
leverage metrics for KPN in full-year 2011. Consequently, we anticipate 	
markedly and durably higher debt leverage than we previously forecast.	
     -- We are lowering our long-term rating on KPN to 'BBB' from 'BBB+'.	
     -- The stable outlook reflects our belief that KPN will sustain its 	
strong business risk profile and improve its credit metrics after a likely 	
deterioration this year.	
    	
    Standard & Poor's Ratings Services lowered its long-term 	
corporate credit rating on Dutch telecom incumbent operator Koninklijke KPN 	
N.V. (KPN) to 'BBB' from 'BBB+'. We affirmed our 'A-2' short term
rating on KPN. The outlook is stable. 	
	
Rationale	
The downgrade reflects our view that KPN's Standard & Poor's-adjusted credit 	
measures will deteriorate more significantly and durably than we previously 	
anticipated. We consider that KPN's revenues, operating margins, and free cash 	
flow will remain under sustained pressure owing to a combination of factors: 	
     -- Falling domestic mobile revenues, and, in our view, the still 	
uncertain timing and extent of the benefits of KPN's recent product 	
restructuring; 	
     -- Fierce ongoing competition from cable operators; 	
     -- Costs for retention efforts, copper network upgrades, and accelerated 	
deployment and marketing of fiber-to-the-home products; and 	
     -- Required fixed outlays to support fourth-generation (4G) mobile 	
technology deployment and potential spectrum acquisitions. 	
	
In addition, increased debt adjustments on the back of higher pension deficit 	
and operating lease commitments at year-end 2011 have pushed up KPN's adjusted 	
debt leverage more than we previously anticipated, translating into an 	
estimated adjusted ratio of debt to EBITDA of more than 3.0x at end-December 	
2011. 	
	
We think that KPN's unadjusted leverage ratio will likely stand in the high 	
end of management's 2.0x-2.5x range in 2012-2013, compared with 2.2x at 	
year-end 2011, and that this would translate into a fully adjusted ratio 	
within a 3.0x-3.5x range. We have consequently revised our assessment of KPN's 	
financial risk profile to "significant" from "intermediate."	
	
We now anticipate that KPN's 2012 EBITDA after restructuring costs will drop 	
by mid-to-high single digits in 2012, after a 6% fall in 2011, compared with 	
our previous estimate of a low-to-mid single digit decline in 2011, followed 	
by stabilization in 2012. In our base-case scenario, we forecast that KPN's 	
EBITDA will rebound somewhat from 2013 onward, on successful cost savings and 	
2012 commercial investments. 	
	
After dividends, we think KPN will retain only modest absolute debt reduction 	
capacity in 2013-2014, whereas absolute debt could increase slightly this year 	
given our anticipation for potential outlays to acquire spectrum. 	
	
The ratings incorporate our assessment of KPN's still strong business risk 	
profile, based on its solid, albeit eroding, domestic market positions, large 	
scale diversification benefits derived from its successfully managed 	
operations in Belgium and Germany, and overall consistent generation of free 	
cash flow.  	
	
Liquidity	
The 'A-2' short-term rating reflects our view of KPN's adequate liquidity 	
under our criteria. 	
	
Under our criteria, we assess KPN's liquidity using debt maturities and 	
undrawn facilities available over a next-six-month basis, given our opinion of 	
its well-established and solid relationships with banks, and that it will 	
continue to have very good access to capital markets in the future owing to 	
its domicile in the Netherlands and absent any exposure to more risky emerging 	
economies. We also consider that KPN has prudent financial management, 	
including a well-spread debt maturity structure with about EUR1 billion to
EUR1.5 billion of annual long-term debt maturities, and still robust generation
of free cash flow (after the "tax recapture" outflows) in excess of EUR1.5
billion on average annually, by our estimates. We also note that KPN has
discontinued share buybacks this year.	
	
Tempering these positive aspects are our anticipation that dividend payouts 	
could leave only modest discretionary cash flow, and heavy postretirement 	
obligations, whose fluctuations, net of dedicated assets, may require 	
additional cash contributions at times. 	
	
The ratio of sources to uses is comfortably above 1.2x at year-end 2011, using 	
next-six-months debt maturities and undrawn facilities. 	
	
Liquidity sources comprise a EUR2 billion committed line maturing in 2016, 	
without any financial maintenance covenants, of which EUR1.6 billion was undrawn	
at year-end 2011; our anticipation of about EUR3.5 billion funds from operations	
(FFO) for full-year 2012; and about EUR1 billion in reported cash  at year-end 	
2011. 	
	
Liquidity uses include EUR0.6 billion of short-term debt within the next six 	
months at year-end 2011, and in full-year 2012 about EUR2.0 billion-EUR2.2
billion 	
in capital expenditures, EUR1.2 billion in dividends, and EUR40 million in 	
additional pension contributions given that KPN's statutory coverage of its 	
pension obligations was below the 105% minimum coverage required by the Dutch 	
pension regulator. 	
	
Outlook	
The stable outlook reflects our view that KPN's product repositioning in 	
mobile, fiber, and upgraded copper, and its cost management will help it to 	
sustain its strong business risk profile and comfortably position the group at 	
its rating level. The outlook also factors in improvement in KPN's adjusted 	
ratio of debt to EBITDA in 2013 and beyond, after possibly increasing to the 	
high end of 3.0x-3.5x this year under our revised base-case forecast. 	
	
We could consider upgrading KPN if it managed to deliver a pronounced 	
turnaround in its EBITDA from 2013 onward, sustained its strong business risk 	
profile, and significantly reduced debt deleverage, so that its fully adjusted 	
debt-to-EBITDA ratio would fall to below 3.0x.     	
	
The possibility of a further downgrade of KPN is remote at this stage but 	
could occur if we weakened our assessment of its business risk profile, and 	
its ratios of debt to EBITDA and FFO to debt were to deteriorate to 	
respectively 3.5x and to below the mid-20% area. Any continued weakening in 	
KPN's EBITDA in 2013 could cause these ratios to deteriorate and lead us to 	
revise our business risk assessment. 	
	
Related Criteria And Research	
     -- Principles Of Credit Ratings, Feb. 16, 2011	
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009	
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 	
May 27, 2009	
     -- Methodology And Assumptions: Liquidity Descriptors For Global 	
Corporate Issuers, Sept. 28, 2011	
     -- Key Credit Factors: Business And Financial Risks In The Global 	
Telecommunication, Cable, And Satellite Broadcast Industry, Jan. 27, 2009	
	
Ratings List	
Downgraded; Ratings Affirmed	
                                        To                 From	
Koninklijke KPN N.V.	
 Corporate Credit Rating                BBB/Stable/A-2     BBB+/Stable/A-2	
 Senior Unsecured                       BBB                BBB+	
	
	
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