TEXT - S&P cuts Phones4u Finance PLC

Overview
-- We anticipate that the operating margin of U.K.-based mobile phone
retailer Phones4u Finance PLC (Phones4u) will continue to decline due to
strong competition. This is likely to pressure the company's credit metrics.
-- We are therefore lowering our long-term corporate credit rating on
Phones4u to 'B' from 'B+'.
-- In addition, we are lowering our issue rating on Phones4u's GBP125
million revolving credit facility to 'BB-' from 'BB', and our issue rating on
the company's GBP430 million senior secured notes to 'B' from 'B+'.
-- The stable outlook reflects our view that Phones4u has the ability to
maintain positive discretionary cash flow and to offset margin pressure to
some degree through revenue growth driven by new store openings.
Rating Action
On Nov. 16, 2012, Standard & Poor's Ratings Services lowered to 'B' from 'B+'
its long-term corporate credit rating on U.K.-based mobile phone retailer
Phones4u Finance PLC (Phones4u). The outlook is stable.

At the same time, we lowered our issue rating on Phones4u's GBP125 million super
senior revolving credit facility (RCF) to 'BB-' from 'BB'. We also lowered our
issue rating on the company's GBP430 million senior secured notes to 'B' from
'B+'.

Rationale
The downgrade reflects our view that Phones4u's gross operating margin will
continue to decline due to strong competition, and increasing marketing and
new store costs. The ongoing decline in the margin is likely to pressure
Phones4u's business and financial risk profiles, which we currently assess as
"weak" and "aggressive," respectively.

Phones4u achieved 11% year-on-year sales growth in the 12 months to Sept. 30,
2012, driven by new store openings and increased marketing investment.
However, the company's Standard & Poor's-adjusted EBITDA margin declined to
12.8%, from 15.0% in the same period to Sept. 30, 2011. We forecast that in
the full year to Dec. 30, 2012 (financial 2012), reported EBITDA will be
broadly in line with 2011, at about GBP120 million.

While Phones4u's year-to-date sales growth of about 15% is broadly line with
our forecasts for financial 2012, flat earnings and the declining operating
margin have caused the company's credit metrics to fall below our guidelines
for a 'B+' rating. This rating reflected our previous assumptions of both
sales and EBITDA margin growth, and consequently significant deleveraging in
terms of our lease-adjusted debt-to-EBITDA ratio. For financial 2012, we now
anticipate that Phone4u's adjusted debt to EBITDA will be close to 5x, and
funds from operations (FFO) to debt will be slightly less than 15%, with both
ratios being weak for an "aggressive" financial risk profile.

Phones4u has been unable to grow its earnings despite sales growth on the back
of its rapid store expansion strategy (it opened about 70 new stores in 2012).
This is because Phones4u faces increasing price competition from its main
competitor Carphone Warehouse Europe (not rated), and from mobile network
operators such as Everything Everywhere (BBB-/Positive/A-3); Vodafone Group
PLC (A-/Stable/A-2); and O2, which is part of Telefonica S.A. (BBB/Watch
Neg/A-2).

Phones4u's performance in financial 2012 remains reliant on the fourth
quarter, during which it usually generates about 40% of its earnings.
Furthermore, Phones4u also has product concentration risk, with 20%-25% of
sales being of the iPhone from Apple Inc. (not rated). Due to the limited
availability of the latest iPhone 5 model, we do not believe that Phones4u is
likely to see an uplift in sales from this new product until 2013.

In our base-case scenario, we forecast revenue growth in the mid-single-digit
range in 2013, driven by ongoing store openings and stable demand for new
mobile devices as consumers continue to upgrade their phones to access the
latest technology. Our forecasts assume ongoing pressure on margins, with an
adjusted EBITDA margin of about 11.5% in 2013 and beyond. This translates into
adjusted EBITDA of about GBP125 million, adjusted debt to EBITDA of more than
4.5x, and FFO to debt of about 15% in 2013.

The rating on Phones4u continues to reflect our assessment of the company's
"aggressive" financial risk profile following its acquisition by private
equity firm BC Partners (not rated) in April 2011. Although we take a positive
view of Phones4u's adequate cash position and largely undrawn RCF, the
company's financial risk profile remains close to the "highly leveraged"
category, due to increasing operating lease commitments and flat EBITDA.

The rating continues to reflect Phones4u's position as the second-largest
independent retailer, behind Carphone Warehouse Europe, in the mature, but
highly competitive, U.K. mobile phone market. The market is characterized, in
our opinion, by volatile demand due to its dependency on discretionary
consumer spending and strong competition from direct sales channels from
mobile telecommunications companies. This risk is further aggravated by the
inherent revenue volatility from ongoing innovation in mobile devices;
independent retailers' ability to access the latest devices; and Phones4u's
reliance on maintaining strong contractual relationships with mobile telecoms
companies.

Liquidity
We assess Phones4u's liquidity profile as "adequate" under our criteria. We
believe that the company's sources of liquidity will comfortably cover its
needs in the near term. Our liquidity assessment is supported by our forecast
that the company's sources of liquidity, including free operating cash flow,
cash on hand, and access to debt facilities, will exceed its uses by at least
1.5x over the next 12 months.

The following factors underpin our assessment of "adequate" liquidity:

-- Our forecast of free operating cash flow of about GBP40 million in 2013.
-- Phones4u's cash on hand of GBP56 million as of Sept. 30, 2012, and
GBP114
million available under a GBP125 million RCF, of which GBP50 million matures in
2013. Apart from that, there are no meaningful debt maturities before 2017.
-- Our forecast of future capital expenditures (capex) of about GBP25
million; no meaningful working capital financing needs; and an absence of
dividend payments.
-- Enough headroom under the financial covenants for the RCF, in our
view, to withstand an unexpected drop in EBITDA of more than 30% in 2013.

Recovery analysis
The issue rating on Phone4u's GBP125 million RCF due 2017 is 'BB-', two notches
above the corporate credit rating. The recovery rating on the RCF is '1',
indicating our expectation of very high (90%-100%) recovery prospects in the
event of a payment default.

The issue rating on Phone4u's GBP430 million senior secured notes due 2018 is
'B', the same level as the corporate credit rating. The recovery rating on the
senior secured notes is '3', indicating our expectation of meaningful
(50%-70%) recovery in the event of a payment default.

The issue and recovery ratings on the RCF and senior secured notes are
supported by:
-- Our valuation of the company as a going concern in an event of
default;
-- The company's U.K. jurisdiction, which we consider as favorable to
secured creditors; and
-- The relatively comprehensive security and guarantee package provided
to the RCF lenders and noteholders.

On the other hand, the recovery rating on the senior secured notes is limited
by the notes' subordination to the RCF, which the documentation stipulates
would rank prior to the notes on enforcement of the collateral.

Our simulated default scenario assumes a combination of deteriorating
macroeconomic conditions and intense pressure on pricing and product mix,
leading to a year-on-year decline in revenues and margins. We believe that
these risks, combined with the company's high leverage, would trigger a
payment default in 2015, at which point EBITDA would have declined to
approximately GBP66 million.

As part of our review of the recovery prospects, we have revised the
hypothetical year of default to 2015 from 2014, to reflect Phone4u's
"adequate" liquidity and bullet repayment structure. Assuming a stressed
EBITDA multiple of 5.5x yields a stressed enterprise value at default of about
GBP360 million.

We then deduct about GBP26 million of enforcement costs, resulting in a net
enterprise value of GBP334 million. On this basis, we see recovery prospects in
the 90%-100% range for the RCF, which we assume would be fully drawn at the
point of default. (We envisage that the GBP50 million portion of the RCF due
2015 would be cancelled). This results in GBP255 million of residual enterprise
value for the GBP450 million of senior secured notes outstanding, translating
into coverage of 50%-70% and a recovery rating of '3'.

Outlook
The stable outlook reflects our view that Phones4u should be able to generate
positive discretionary cash flow and offset ongoing margin pressure to some
degree through revenue growth on the back of new store openings and continued
demand for new mobile devices.

We could lower the rating if Phones4u does not achieve revenue growth in the
mid-single digits, or if its gross operating margin continues to deteriorate,
causing earnings to fall, adjusted debt to EBITDA to sustainably exceed 5x, or
discretionary cash flow to turn negative. Ratings pressure may also arise if
Phones4u adopts more aggressive financial policies to fund shareholder
remuneration or if it increases capex significantly to expand into new areas
of business.

A positive rating action would be linked to stabilizing margins and strong
earnings growth, with adjusted debt to EBITDA falling to less than 4x and FFO
to debt rising to more than 20%.

Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
Portal, unless otherwise stated.
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers'
Speculative-Grade Debt, Aug. 10, 2009

Ratings List
Downgraded; CreditWatch/Outlook Action
To From
Phones4u Finance PLC
Corporate Credit Rating B/Stable/-- B+/Negative/--

Downgraded; Unchanged
To From
Phones4u Finance PLC
Senior Secured
GBP430 mil. bnds due 12/31/2018 B B+
Recovery Rating 3 3
GBP125 mil. fltg rate revolving credit BB- BB
fac (GBP50 mil. due 2013; GBP75 mil. due
03/17/2017) bank ln
Recovery Rating 1 1