TEXT - Fitch affirms TDC A/S ratings
(The following statement was released by the rating agency) Dec 20 - Fitch Ratings has affirmed TDC A/S's (TDC) Long-term Issuer Default Rating (IDR) at 'BBB'. The Outlook is Stable. A full list of rating actions is at the end of this release. TDC's credit profile is underpinned by its strong domestic position, particularly in the fixed line business. Management's recent decision to reduce the dividend payout as a proportion of underlying pre-dividend free cash flow should keep leverage within the range associated with a 'BBB' rating, despite Fitch's expectations that EBITDA will remain under pressure in 2013 and 2014. KEY DRIVERS - Strong fixed-line market position Uniquely, TDC owns both the Danish incumbent copper network and the majority of the cable infrastructure in the country. This gives the company an exceptionally strong fixed line position when compared to all other European incumbents and helps the company generate a best-in-class EBITDA margin - excluding the Nordics business, the company's last-12- months (LTM) 3Q12 EBITDA margin was 45% (note that Fitch excludes TDC's pension income from its definition of EBITDA). Hampering TDC's fixed line dominance in recent years has been the aggressive fibre rollout and competitive moves by utility operators. Further aggressive moves by the utilities could hinder TDC's ability to limit the slight decline in EBITDA that the company expects for 2013. - Competitive mobile market The Danish mobile market consists of four mobile network operators, which all operate their own core brands along with a number of MVNO brands. Some of these companies have been competing aggressively on price, which has led to large declines in profitability for the market as a whole. Another mobile termination rate cut is due in January 2013. In some markets, competitors have used these cuts to reduce market prices further, which could put further pressure on profitability. In response, TDC has begun to reduce its mobile customer costs by reducing handset subsidies. The move away from such costs is an industry challenge and necessary to ease some of the pressure on industry profitability. For TDC so far, the move has not negatively affected its mobile subscriber market share. While it has put some pressure on the company's working capital, Fitch expects that the move should be broadly credit positive for TDC. - Lower profitability The regulatory and competitive pressures have caused the EBITDA of TDC's domestic incumbent business (i.e. excluding Nordic and YouSee) to fall to DKK8.1bn in LTM 3Q12 (DKK8.3bn in 2011, DKK8.4bn in 2010). Growth in YouSee and the Nordic business has so far offset these declines, such that LTM group EBITDA at 3Q12 stood at DKK10.4bn (DKK10.5bn in 2011, DKK10.4bn in 2010). Fitch is concerned that further pressure at TDC's core domestic operations in the coming years could be greater than the offsetting growth from YouSee and the Nordic business. However, most other European incumbents have incurred quite significant declines in profitability over the past two years - something that TDC as a whole has not experienced. - Reduced Shareholder Remuneration TDC's EBITDA could fall slightly in 2013, while capex could trend higher, which together would put downward pressure on free cash flow. To counteract this, the company introduced a lowered shareholder distribution policy starting in 2013. Fitch views this positively as it will help to preserve the company's deleveraging ability, and indicates that the company is committed to its leverage guidance of 2.2x net debt/EBITDA. RATING SENSITIVITY GUIDANCE: Negative: Future developments that could lead to negative rating action include: - A negative rating action could occur if funds from operations (FFO) adjusted net leverage exceeds 3.5x over a sustained period of time - A marked deterioration in TDC's operating environment or adverse regulatory decisions Positive: Future developments that could lead to positive rating action include: - FFO adjusted net leverage below 3.0x, together with evidence of an improved domestic competitive environment LIQUIDITY AND DEBT STRUCTURE TDC has a strong liquidity position with cash and equivalents of DKK262m at Q312 together with undrawn credit facilities of EUR700m. TDC's next bond maturity is not until February 2015. The rating actions are as follows: TDC A/S: Long-term IDR: affirmed at 'BBB' with a Stable Outlook Short-term IDR: affirmed at 'F3' (Caryn Trokie, New York Ratings Unit)
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