TEXT - S&P revises Telekomunikacja Polska S.A.
(The following statement was released by the rating agency) Overview -- Polish telecommunications operator Telekomunikacja Polska S.A. (TPSA) is facing significant operating challenges in its mobile unit owing to increased competition and regulatory actions, including the reduction of mobile termination rates. -- Consequently, we have revised downward our base-case forecast on TPSA and anticipate a potentially meaningful deterioration in the company's credit metrics over the next 12-18 months. -- We are therefore revising our outlook on TPSA to negative from stable and affirming the 'BBB+' long-term corporate credit rating on the company. -- The negative outlook reflects the possibility of a downgrade over the next 18 months if TPSA's adjusted leverage increases to more than 2x, with no short-term deleveraging prospects. Rating Action On Nov. 16, 2012, Standard & Poor's Ratings Services revised its outlook on Polish telecommunications operator Telekomunikacja Polska S.A. (TPSA) to negative from stable. At the same time, we affirmed our 'BBB+' long-term corporate credit rating on the company. Rationale The outlook revision follows a downward adjustment to our base-case operating scenario for TPSA to reflect intensified competition in its core mobile unit. We forecast that a combination of a decline in EBITDA, weaker discretionary cash flow generation, and potentially meaningful cash outflows on spectrum acquisitions may lead TPSA's credit metrics to deteriorate to levels that are not commensurate with our assessment of TPSA's financial risk profile as "modest" and our current 'BBB+' rating on the company. TPSA has revised its guidance and outlook for 2012 due to its operating environment deteriorating faster than it expected. We anticipate an even more significant fall in revenues in 2013 than in 2012, because of significant downward price pressure on mobile voice call prices. This is due to a combination of regulatory actions, including a mandatory cut in mobile termination rates (down 65% in the year to July 2013), and an increasingly competitive environment in the post-paid and pre-paid mobile segments. We also anticipate that the ongoing decline of public switch telephone network (PSTN) lines and consequently, of average revenues per user (ARPU), will continue. We also assume that growing subscriber acquisition costs on account of increasing smartphone sales, declining mobile ARPUs, and a decline in PSTN lines will more than offset the positive effect of a fall in interconnection costs and other cost efficiencies. We therefore estimate that TPSA's EBITDA margin will fall further in 2013. Overall, this leads to a meaningful decline in reported EBITDA under our base-case scenario for 2013. We anticipate that free cash flow could fall further in 2013, before one-off payments for spectrum acquisitions, compared with PLN2.4 billion in 2011 and management's guideline of PLN1.5 billion-PLN1.6 billion in 2012. This is despite our assumption that TPSA will reduce its recurring annual capital expenditures (capex) following the decline in broadband investments. We also assume that TPSA will reduce dividend distributions, following management's announcement of a drop in the 2012 cash distribution to PLN1 per share, leading to break-even to slightly negative discretionary cash flows before spectrum payments. We therefore forecast that TPSA's Standard & Poor's-adjusted leverage will increase to about 1.7x in 2012 and that adjusted FFO to debt will decline to about 55%. We think that adjusted leverage may potentially increase to more than 2x in 2013, depending on the extent of the decline in EBITDA decline, cash outflows for spectrum acquisitions, and offsetting actions by TPSA. TPSA is about 50% owned by the French telecom incumbent France Telecom (A-/Negative/A-2). We currently assess TPSA's business risk profile as "satisfactory." Liquidity We view TPSA's liquidity as "adequate" under our criteria. We forecast that the ratio of internal liquidity sources to uses will be more than 1.2x over the next six months, but will potentially fall to less than 1.2x in 2013. Our assessment of TPSA's liquidity as "adequate" also relies to a large extent on our expectation of support from its parent company, France Telecom. This could take the form of France Telecom providing financial support in order to support one-off cash outflows on items such as spectrum acquisition. As of Sept. 30, 2012, we estimate that TPSA's total liquidity sources over the next 12 months will amount to PLN4.2 billion-PLN4.7 billion, including cash on balance sheet of PLN473 million and long-term undrawn credit facilities. We estimate that TPSA's liquidity needs over the same period will amount to PLN4.2 billion-PLN4.5 billion before spectrum payments and including debt maturities of PLN930 million. Outlook The negative outlook reflects the possibility of a one-notch downgrade over the next 18 months if TPSA's adjusted leverage increases to more than 2x, with no short-term deleveraging prospects. This could be the case if EBITDA declines at a meaningful rate in 2013 and if TPSA spends several hundred million of zlotys on spectrum acquisition without significant offsetting measures. We could downgrade TPSA to 'BBB' if we revise downward our assessment of its financial risk profile to "intermediate" from "modest," alongside a "satisfactory" business risk profile. We view adjusted leverage of 2.0x-2.5x and FFO to debt of 35%-40% as consistent with an "intermediate" financial risk profile. We could revise the outlook to stable if TPSA's operating performance is significantly better than our base-case scenario for 2013. We could also stabilize the outlook if TPSA takes active steps to reduce its debt, resulting in adjusted leverage of less than 2x and adjusted FFO to debt of more than 40% on a sustainable basis. Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated. -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Principles Of Credit Ratings, Feb. 16, 2011 -- Methodology and Assumptions: Recognizing The Settlement Obligation For Foreign-Currency Hedges Of Debt Principal, April 15, 2010 -- Key Credit Factors: Methodology And Assumptions On Risks In The Global High Technology Industry, Oct. 15, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 -- Corporate Criteria--Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link to Parent, Oct. 28, 2004 Ratings List Ratings Affirmed; CreditWatch/Outlook Action To From Telekomunikacja Polska S.A. Corporate Credit Rating BBB+/Negative/-- BBB+/Stable/-- Senior Unsecured Debt BBB+ TPSA Eurofinance France S.A. Senior Unsecured Debt* BBB+ *Guaranteed by Telekomunikacja Polska S.A. (Caryn Trokie, New York Ratings Unit)
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