TEXT-S&P revises Matterhorn Mobile Holdings outlook to negative
Overview -- Matterhorn Mobile Holdings S.A., one of Orange Communications S.A.'s holding companies, is paying a Swiss franc (CHF)186 million dividend to its private equity sponsor, Apax. -- Simultaneously, Matterhorn Midco & Cy S.C.A., Matterhorn Mobile Holdings S.A.'s 100% owner, is issuing EUR155 million in senior unsecured notes to fund the dividend. -- We are revising our outlook to negative from stable and affirming our 'B+' long-term rating on Matterhorn Mobile Holdings. -- The negative outlook reflects the risk of a downgrade in the next 12 months if the company fails to sustain its recent turnaround performances, or if renewed recapitalization measures further weaken our anticipations for its credit metrics. Rating Action On Sept. 24, 2012, Standard & Poor's Ratings Services revised its outlook on Luxembourg-based Matterhorn Mobile Holdings S.A., one of Orange Communications S.A.'s holding companies, the third-largest wireless network operator in Switzerland, to negative from stable. At the same time, we affirmed our 'B+' long-term corporate credit rating on Matterhorn Mobile Holdings. We also assigned an issuer credit rating of 'B+' to Matterhorn Midco & Cy S.C.A., Matterhorn Mobile Holdings' parent, and our recovery rating of '6' and issue rating of 'B-' to the proposed Swiss franc (CHF)188 million (EUR155 million) senior notes maturing 2020, to be issued by Matterhorn Midco & Cy. We also affirmed our 'BB', 'BB-', and 'B-' issue ratings on the CHF100 million super senior revolving credit facility (RCF) due 2018, the existing senior secured notes due 2019, and the existing senior unsecured notes due 2020. The recovery ratings on these instruments remain unchanged at '1', '2' and '6'. Our ratings are subject to our satisfactory review of the final documentation. Rationale The outlook revision reflects our view that the recapitalization initiative, only days after a EUR90 million dividend, demonstrates Matterhorn Mobile Holdings' financial policy's very aggressive nature, as set by its controlling equity sponsor. The outlook revision also factors in that previous headroom existing within the rating has been entirely consumed. In addition we are concerned that further credit dilutive financial policy initiatives are likely within a year, or that any softening of trading performances could lead to less-than-adequate credit metrics. At this stage, we project 2012 EBITDA interest coverage of more than 3x, and a spike in the debt-to-EBITDA ratio to slightly more than 5x. Our adjusted debt includes debt sitting at the company's parent, the CHF69 million portion of the recent CHF155 million spectrum investment that will be paid in two installments in 2015 and 2016, and customary adjustments for operating leases, asset retirement, and pension obligations. The rating on Matterhorn Mobile Holdings is constrained by our assessment of the company's financial risk profile, which we have changed to "highly leveraged" from "aggressive," as our criteria define the term. The rating is supported by our assessment of the company's business risk profile as fair. The financial risk profile reflects our view of Matterhorn Mobile Holdings' very aggressive financial policy, given the company's private equity ownership, and our expectation of modest free cash flow generation and a high debt-to-EBITDA ratio in 2012. We believe Matterhorn Mobile Holding's business risk profile is constrained by the company's lack of scale and diversity, owing to its narrow business and geographic focus, considerable competition from the dominant market player, and some execution risk as the company rolls out its strategy as a stand-alone company. We view the company's business risk profile as weaker than those of its two main competitors, Swisscom AG (A/Stable/--) and Sunrise Communications Holdings S.A. (B+/Stable/--). Matterhorn Mobile Holdings is focused on mobile telecommunications while both its competitors are integrated into fixed network services. It also has lower EBITDA margins than most rated European peers, given its smaller scale and challenger position compared with Swisscom's strong position in the domestic market. These business weaknesses are balanced by the company's well-established high-end wireless position, a broadly satisfactory and nearly completely revamped network, a wealthy and stable domestic economy, and our expectation that the competitive environment will not change significantly, given high entry barriers and more favorable regulation than in other European markets. Liquidity We consider Matterhorn Mobile Holdings' liquidity to be "adequate," as our criteria define this term. Cash liquidity should remain comfortable, given overall positive free cash flows and a bullet-only 2018-2020 debt maturity, except for the CHF69 million of spectrum installments due in 2015-2016. In addition, we foresee adequate covenant headroom in the future. The ratio of sources to uses over the next 12 months is significantly above 1.2x, factoring in a EUR100 million undrawn committed facility, available cash--more than CHF80 million expected at closing--and our expectation of over CHF200 million in annual funds from operations, compared with less than CHF200 million in capital expenditure (capex), excluding the CHF93 million spectrum installment paid in July 2012. A maintenance financial covenant existing under the proposed super senior revolving credit facility (RCF) should provide ample headroom in the future, in our view. Recovery analysis The 'B-' issue rating and '6' recovery rating on the proposed EUR155 million notes issued by Matterhorn Midco & Cy and the existing EUR225 million 8.25% senior unsecured notes due 2020 indicate our expectation of negligible (0%-10%) recovery in the event of a payment default. The 'BB-' issue rating and '2' recovery rating on the CHF450 million 6.75% senior secured notes due 2019, the EUR330 million floating-rate senior secured notes due 2019, and the CHF180 million floating-rate senior secured notes due 2019 indicate our expectation of substantial (70%-90%) recovery in the event of a payment default. The 'BB' issue rating and recovery rating of '1' on the CHF100 million super senior RCF indicate our expectation of very high (90%-100%) recovery in the event of a payment default. The proposed EUR155 million notes due 2020 ("the proposed notes") will be unsecured obligations of Matterhorn Midco & Cy, Matterhorn Mobile Holdings' parent company, and will be guaranteed by Matterhorn Mobile Holdings. We have considered the proposed notes to have a weaker position and weaker potential for recovery than the existing EUR225 million 8.25% senior unsecured notes due 2020, because the latter benefit from subordinated guarantees from Orange Communications, Orange Network, and Matterhorn Mobile S.A., a subsidiary of Matterhorn Mobile Holdings, and second-priority pledges over the shares of Matterhorn Mobile S.A. Our simulated default scenario assumes a payment default would occur in 2016 due to excessive leverage as a result of operating underperformance, with EBITDA falling to about CHF223 million, with a stressed enterprise value of around CHF1,115 million. We value the group on a going-concern basis, taking into account its established market position, valuable network and customer base, and high barriers to entry into a consolidated industry. From this we deduct priority liabilities of around CHF98 million, comprising enforcement costs and a part of the group's unfunded pension deficit. This leaves very high (90%-100%) recovery prospects for super senior lenders. The residual value for the senior secured note holders is about CHF912 million, and the senior secured debt is around CHF1,060 million, including prepetition interests, leading to substantial (70%-90%) recovery for note holders. This leaves negligible (0%-10%) recovery prospects for the senior unsecured note holders and the proposed notes. Outlook The negative outlook reflects the risk of a downgrade in the next 12 months if the company fails to sustain its recent turnaround performances, or if renewed recapitalization measures further weaken our anticipations for its credit metrics. These include cash interest cover of more than 3x, a debt-to-EBITDA ratio of less than 5.5x, and annual free cash flow of roughly EUR50 million-EUR100 million in 2013-2014. Rating upside potential is remote as long as private equity shareholders retain control of the company. Related Criteria And Research -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 -- Principles Of Credit Ratings, Feb. 16, 2011 -- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 -- Key Credit Factors: Business And Financial Risks In The Global Telecommunication, Cable, And Satellite Broadcast Industry, Jan. 27, 2009 Ratings List New Rating Matterhorn Midco & Cy S.C.A. Senior Unsecured B- New Rating; CreditWatch/Outlook Action Matterhorn Midco & Cy S.C.A. Corporate Credit Rating B+/Negative/-- Ratings Affirmed; CreditWatch/Outlook Action To From Matterhorn Mobile Holdings S.A. Corporate Credit Rating B+/Negative/-- B+/Stable/-- New Rating Matterhorn Midco & Cy S.C.A. Senior Unsecured EUR155 mil nts due 12/31/2020 B- Recovery Rating 6 Not Rated Action To From Matterhorn Mobile S.A. Senior Secured CHF225 mil var rate Facility A bank NR BB- ln due 01/30/2018 Recovery Rating NR 2 CHF100 mil var rate bank ln due NR BB- 01/30/2018 Recovery Rating NR 2 Ratings Affirmed Matterhorn Mobile Holdings S.A. Senior Unsecured Local Currency B- Recovery Rating 6 Matterhorn Mobile S.A. Senior Secured CHF450 mil 6.75% nts due 05/15/2019 *BB- Recovery Rating 2 EUR150 mil nts due 05/15/2019 *BB- Recovery Rating 2 EUR180 mil fltg rate nts due *BB- 05/15/2019 Recovery Rating 2 CHF180 mil nts due 12/31/2019 *BB- Recovery Rating 2 CHF100 mil var rate RCF due 2018 *BB bank ln Recovery Rating 1 *Guaranteed by Matterhorn Mobile Holdings S.A. Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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