TEXT-Fitch: KPN to strengthen balance sheet, domestic business still under pressure
Feb 5 - Fitch Ratings says that Royal KPN N.V.'s (KPN, 'BBB-'/Stable) announced EUR4bn rights issue to strengthen its balance sheet shows that the company is committed to maintaining its investment grade profile. However, Q412 results show that the company continues to operate in a challenging environment. Fitch does not expect KPN's operating free cash flow to recover significantly in 2013 and 2014. Intense competition continues in the Dutch telecoms market, which could be exacerbated by the expected new mobile entrant, Tele2. A weak macroeconomic backdrop is negatively impacting KPN's Dutch corporate and IT segment, while increased price competition and regulatory pressure is resulting in lower revenue growth in Germany. Despite lower EBITDA, Fitch expects capex to remain around 2012 levels as KPN continues to upgrade its networks to maintain its leading position in the Netherlands and to boost growth in Germany. KPN ended 2012 with a net debt/EBITDA ratio (including Reggefiber-related liabilities, excluding gains from disposals) of 3.2x. A successful rights issue would allow KPN to continue to invest without being constrained by the current high level of leverage. Fitch downgraded KPN to 'BBB-'/Stable on 17 Dec 2012 following the conclusion to the Dutch spectrum auction. This rating action did not factor in any action by the company to strengthen its balance sheet. Successful completion of the proposed EUR4bn rights issue would result in KPN's leverage falling below the key 3.0x threshold. To consider positive rating action, Fitch would also want to see clear evidence that there is a sustained improvement in KPN's domestic fixed and mobile operations. Reggefiber, KPN's joint venture to rollout a fibre-to-the-home (FTTH) network in the Netherlands, is a key part of KPN's strategy to compete against the triple-play threat from the Dutch cable companies. KPN could own 100% of Reggefiber by 2017 (after the exercise of two options, subject to regulatory approval) which leads us to include all of the Reggefiber-related liabilities when assessing KPN's credit profile. These liabilities include the exercise of options to buy the 49% of Reggefiber that KPN does not own, and the shareholder loans and external financing incurred to support the FTTH network rollout. By end-2014, when KPN might have to fully consolidate Reggefiber, Fitch estimates these liabilities could amount to around EUR2bn, including the contingent liability from the last option exercisable as of 2017. Additional information is available at www.fitchratings.com.