Fitch affirms Sunrise at 'BB-'; rates Mobile Challenger Intermediate Group's notes 'B- (EXP)'
March 11 |
March 11 (Reuters) - (The following statement was released by the rating agency) LONDON, March 11 (Fitch) Fitch Ratings has affirmed Sunrise Communications Holdings S.A.'s (Sunrise) Long-term Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook and senior notes at 'B'. The agency has also affirmed the senior secured fixed and floating rate notes issued by Sunrise Communications International S.A and the senior secured RCF borrowed by Sunrise Communications AG at 'BB'. Fitch has assigned Mobile Challenger Intermediate Group S.A. (HoldCo), Sunrise's parent company and the issuer of the PIK Notes, an IDR of 'B+' with a Stable Outlook. Fitch has also assigned a 'B-(EXP)/RR6' instrument rating to the planned issuance of the EUR500m equivalent PIK notes. The final instrument rating will be contingent on the receipt of the final documents conforming materially to the preliminary documentation. The EUR500m equivalent PIK notes will be issued outside of Sunrise's restricted group and are therefore not expected to have impact on Sunrise's financial profile. The notes have a maturity of six years and the proceeds will be used to repay part of the issuer's existing preferred equity certificates (PECs). The PIK notes will represent a senior obligation of the issuer and will not benefit from any guarantees or security over the restricted group. No cross-default provision regarding these PIK notes is included in the restricted group's financing documentation. A pay-if-you-can option is envisaged under the notes indentures whereby the issuer may defer interest payments under certain conditions, with cash interest payments on the notes being subject to the restricted payment basket available under the restricted group's financing documentation. HoldCo's IDR reflects its higher default risk relative to Sunrise. This is largely attributable to the higher degree of financial risk of the latter due to its subordinated nature within the holding structure and significant limitations (e.g. restricted payments) to upstream payments from the restricted group. According to Fitch's "Parent and Subsidiary Rating Linkage" criteria, dated 8 August 2012, and Fitch's Special Report on the "Treatment of Junior Corporate Debt in Europe" dated 08 April 2011, both available at www.fitchratings.com, Fitch notes that although strategic ties exist between HoldCo and the restricted group, HoldCo's IDR could be at best one notch lower than the restricted group's IDR. The one-notch differential between the IDRs of the two entities reflects the default risk of HoldCo, which is linked to the operating performance of the restricted group. The expected instrument rating on the PIK notes reflects the deeply subordinated nature of these instruments relative to Sunrise's liabilities as well as the absence of direct claims over the restricted group other than a residual equity claim in Sunrise. Fitch believes that under a distressed scenario, this feature is likely to result in poor recovery ratings of 'RR6' in the range of 0%-10%. KEY RATING DRIVERS Strong Operating Performance To Slow Down The affirmation of Sunrise's IDR reflects the company's strong market position in the Swiss telecommunications market as well as its positive performance throughout 2012, with revenues and EBITDA in line with Fitch's expectations despite material price cuts implemented in Q312. Fitch expects Sunrise's top-line performance in the mobile business to slow down in 2013 as mobile customers migrate to more convenient price plans due to the recent tariff reductions. However, this is not expected to have a material impact on EBITDA due to the significant cost restructuring measures implemented by the company in Q412 as well as ongoing subscriber growth within the higher ARPU/AMPU post-paid mobile segment. Free Cash Flow (FCF) Generation Despite Increasing Capex Fitch believes FCF generation before spectrum-related payments will remain strong over the next 12-18 months, underpinned by relatively stable EBITDA despite a significant increase in capex. This will be mainly related to the upgrade of the mobile network to LTE as well as further roll-out of the existing UMTS network. Downside pressure on cash flow is also likely to be exerted by upstream payments out of the restricted group. Challenging Competitive Environment The ratings are constrained by Fitch's expectation of a more aggressive competitive environment following Swisscom's and Sunrise's mobile tariff reductions implemented in 2012, as this could possibly trigger a reaction from third-placed Orange, despite its different market positioning within the higher ARPU segment. However, Fitch believes Sunrise's fixed line business could be more affected by increased competition due to its weaker business profile and the presence of aggressive competitors such as Cablecom and Swisscom, which are both capable of providing a competitive and comprehensive commercial offer. While the recent successful introduction of IPTV and the future roll-out of FTTH will benefit Sunrise's fixed line business by complementing its commercial offer, in our view this will not be sufficient to mitigate its vulnerability to increasing competition. Leveraged Capital Structure, Slower De-Leveraging Profile The ratings are constrained by the company's leveraged capital structure - with funds from operations (FFO) adjusted net leverage of 4.4x as of December 2012 - resulting in large cash interest payments, as well as by a slower de-leveraging profile than previously anticipated due to the expectation of a slow-down in cash flow generation. Treatment of Junior Debt In its assessment of the capital structure, Fitch has not included within its leverage metrics the liabilities arising from the issuance of PECs issued by Sunrise, or the PECs and new PIK facility issued by HoldCo. RATING SENSITIVITIES (Sunrise) Positive: Future developments that could lead to positive rating actions include: - FFO net adjusted leverage to fall well below 4.0x - FFO interest cover above 4.0x Negative: Future developments that could lead to negative rating action include: - Failure by the company to reduce leverage below 4.5x on FFO adjusted net basis over the next one to two years - FFO interest cover below 2.75x RATING SENSITIVITIES (HoldCo) Positive: Future developments that could lead to positive rating actions include: - Positive rating actions on Sunrise Negative: Future developments that could lead to negative rating action include: - Negative rating actions on Sunrise - An increase in the notching differential from Sunrise's IDR is likely to be driven by an increase in leverage of the HoldCo or the issuance of new cash pay debt with no PIK option.
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