TEXT-Fitch Affirms Pacnet at 'B+'; Outlook Negative
(The following was released by the rating agency)
SEOUL/SYDNEY/SINGAPORE, September 28 (Fitch) Fitch Ratings has affirmed Pacnet Limited's (Pacnet) Long-Term Issuer Default Rating (IDR) at 'B+' with a Negative Outlook. Fitch has also affirmed the company's guaranteed USD300m senior secured notes due 9 November 2015 at 'BB+' with a Recovery Rating of 'RR1'. The telecoms company has dual headquarters in Hong Kong and Singapore.
The rating is constrained by Pacnet's small operational scale and slow EBITDA growth in the highly competitive submarine cable business. Its 2011 EBITDA of just USD78m is small compared with other global telecom service providers rated by Fitch and the agency does not expect any significant expansion in Pacnet's operational scale in the medium- to long-term.
The Negative Outlook reflects Fitch's view that the company's financial profile is unlikely to show a meaningful improvement due to continued price erosion in bandwidth capacity despite solid demand growth, and a lack of significant contribution from the data centre business. It also reflects the risk that the company may breach the financial covenant in its USD50m credit facility in 2013 if it fails to renegotiate with its creditor banks. The USD50m credit facility comprises a USD30m term loan facility and a USD20m revolving credit facility.
For H112, Pacnet recorded slow yoy growth in revenue to USD267m (H111: USD259m), and in EBITDA to USD38m (USD36m). In addition, the company's free cash flow (FCF) continued to be negative due to high capex in H112 and 2011 and Fitch does not forecast this trend to reverse over the medium term. The agency therefore forecasts the company's funds flow from operations (FFO) adjusted net leverage will rise towards 4x by end-2012 from 3.5x at end-2011.
Fitch believes that, based on the agency's current forecast, the company will struggle to meet the debt cover ratio covenant in the USD50m credit facility when the covenant tightens from 2013. Under the facility documentation, the debt cover ratio, measured by adjusted debt/EBITDA, will fall to 4.0x in 2013 from 4.3x in 2012. An un-remedied breach of the covenant may lead to acceleration of the facility and the USD bonds. Fitch believes that the company is seeking to renegotiate the covenant with its creditor banks. Failure to do so in a timely manner would negatively affect the company's ratings.
Pacnet's liquidity remains comfortable, underpinned by its cash balance of USD84m at end-H112 and limited debt maturities before end-2014. Fitch does not foresee any serious liquidity risks in the short term despite ongoing negative FCF and the upcoming expiry of the USD20m revolving facility in November 2012.
The 'RR1' Recovery Rating on the guaranteed notes reflects an expected value recovery of above 90% for bondholders in the event of default, based on Fitch's assessment of Pacnet's value in a stressed scenario.
What Could Trigger A Rating Action?
Negative: Future developments that may, individually or collectively, lead to negative rating action include
-FFO-adjusted net leverage rising over 4x and FFO fixed charge coverage falling below 2x on a sustained business
- failure to renegotiate the financial covenants in the credit facility in a timely manner
.Positive: Future developments that may, individually or collectively, lead to positive rating action include
-FFO fixed charge coverage rising above 2x, and FFO-adjusted net leverage falling below 4x on a sustained basis
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