TEXT - Fitch revises UAB Bite Lietuva outlook to positive

Fri Dec 21, 2012 11:02am EST

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(The following statement was released by the rating agency)

Dec 21 - Fitch Ratings has revised the Outlook on UAB Bite Lietuva's (Bite) Long-term Issuer Default Rating (IDR) to Positive from Stable. The agency has also affirmed SIA EECF Bella Finco's senior secured revolving credit facility (RCF) at 'B'. The facility's Recovery Rating is 'RR3'. The senior secured notes due 2014 issued by Bite Finance International BV have been affirmed at 'B-'. The notes' Recovery Rating is 'RR4'. The Positive Outlook takes into account the steps management are taking to address the refinancing risk in 2014, and an expectation of solid free cash flow performance which will in turn drive a moderately improving leverage profile. Focus on cash flow generation and deleveraging accompanied by a measured approach to the further development of the group's market position in Latvia are, in Fitch's view, the right strategic objectives for a business that is limited by its small size, mature markets and a tough competitive environment. A successful outcome to its refinancing initiatives and delivery of the agency's forecast expectations for 2013 should provide support for a potential upgrade. Key Rating Drivers - Growing Operations in Latvia: Bite has made solid progress in developing its subscriber base in Latvia over the past two years, momentum that management expect to continue into 2013. A shift in the business mix to post-paid subscribers should continue to support blended ARPU metrics and help manage churn rates. Subscriber acquisition and retention costs - albeit characterised as customer loans - will need to be managed in a continued growth phase and it remains to be seen whether management can succeed in efforts to reduce/stabilise the negative working capital trends that this business model generates. The potential for escalating bad debt in the event of a further economic downturn will need to be monitored given the change in the handset model. - Growing Cash Flows: Free cash flow has developed well over the past two years with the company generating a free cash flow margin of 9.4% in 2011 - a metric which is strong for the rating level. While handset related working capital investments have resulted in this metric coming under pressure in 2012, a low single digit metric and scope to expand the metric in future years, points to an ongoing ability to deleverage. - Improving Leverage Metrics: Unadjusted (net debt / EBITDA) leverage of 4.3x for 2011 was a sharp improvement on the previous year with free cash flow performance in the current year likely, in Fitch view, to result in the metric falling comfortably below 4.0x in 2012. The company's target to reduce the metric below 3.5x in 2013 highlights a commitment to a conservative financial policy, something that should help in management's objectives to refinance the 2014 bond. Fitch's rating case suggests a metric that should be around 3.7x to 3.8x in 2013; a level that is strong for the current ratings and supports the Positive Outlook. - Need to Refinance Bonds: The company has EUR171m of outstanding senior secured bonds maturing in March 2014, representing the mainstay of the company's debt capital. Fitch expects management to take action early in 2013 to address this maturity with discussion suggesting the company is exploring opportunities both in the bank and secured bond markets. A successful refinancing of the bonds in H113 will be seen as a validation of management's strategy by the credit markets, and represent a materially positive event in terms of support for the Positive Outlook and key step in any eventual upgrade. A poor market reaction or market conditions that obstructed a successful transaction will inevitably weigh on the rating, the significance of which will grow in importance as the maturity of the bonds gets nearer. - Challenging Operating Environment Bite operates in two competitive markets, in both cases against competitors (TeliaSonera and Tele2) with scale, diversification and a stronger financial position. Its markets are mature and Bite is positioned in both, as the market number three by a considerable margin. While being positioned as the challenger provides the opportunity to take share from the incumbents, its competitors are both in a much stronger position to endure a period of sustained economic downturn or if they chose to do so, to propagate a sustained period of aggressive pricing or otherwise disrupt the market. LTE spectrum auctions in 2013 are an outlying risk, a cost that has proven in some markets to have been unexpectedly high, and risk that could increase capex pressures. - Small Size, Limited Flexibility: The degree to which the economy affected Bite in the 2007 - 2009 downturn demonstrated the constraints its limited size and market position can exert on the company's operating and financial profile; effects that were felt far less sharply by its larger competitors given their inherently stronger operations and the diversification within their businesses. RATING SENSITIVITY GUIDANCE: Positive: Future developments that could lead to positive rating actions include: - Latvian operations combining EUR45-50m in service revenue and EBITDA margin 20%, combined with a broadly stable performance in Lithuania - Successful refinancing of 2014 bonds - 2013 financial leverage - FFO net adjusted leverage - consistent with Fitch's rating case of 3.7x or below - Sufficient investments into 3G and successful modernization of 3G network in Lithuania (3G coverage in line with management 2013 plan) - Consistently positive free cash flow Negative: Future developments that could lead to negative rating action include: - Stabilisation at the current level to reflect expectations the above criteria are unlikely to be met by mid-2014. - Failure to refinance the 2014 bonds by H213 would lead to a Negative Outlook at a minimum. (Caryn Trokie, New York Ratings Unit)

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