RPT-Fitch affirms Telenet N.V. at 'B+'; stable outlook
Aug 21 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Telenet NV's (Telenet) Long-term Issuer Default Rating (IDR) of 'B+' its Short-term IDR of 'B'. The Outlook on the Long-term IDR is Stable. The agency also affirmed the group's senior secured rating at 'BB.' Fitch has assigned Recovery Ratings of 'RR2' to the secured debt. A list of related instrument ratings is provided at the end of this release.
The ratings take into account strong operational metrics, consistent revenue and cash flow growth and progressive telecoms management. Concerns relate to the potential unbundling of Belgium's cable networks and what advantage alternative network operators might gain from this, along with the margin dilutive effects of the company's mobile strategy.
The key constraint to the rating is the company's stated financial policy which appears increasingly driven by the main shareholder - including a leverage target and commitment to shareholder distributions which are inconsistent with a higher rating than 'B+'.
KEY RATING DRIVERS
Financial Policy Constraining Rating
Telenet N.V.'s ratings are constrained by the group's publically stated financial policy of managing net leverage (effectively its bank debt and secured notes) towards the higher end of a 3.5x to 4.5x range. When operating leases and liabilities related to mobile spectrum (which combined amounted to EUR469.5m at end-2012) the ratio is expected to be kept close to a 5.0x threshold.
Telenet has consistently generated strong results - both operationally and financially. An incumbent position in the TV market, where cable continues to dominate as the platform of choice for the majority of TV households, has positioned it well to sell-through its high-speed broadband and telephony product. Multi-play penetration is high (at 73% Q213), supporting one of the highest average revenue per user (ARPU) and revenue growth performances in the sector - with Telenet viewed as among the strongest in the peer group.
The standalone approach taken by Fitch in rating the company reflects the non-recourse nature of Telenet's debt to its majority shareholder, Liberty Global Plc. and the wider Liberty Global cable portfolio. Fitch nonetheless expects financial policies to increasingly reflect a Liberty Global target range of net total debt to EBITDA of 4.0x - 5.0x and that the metric is likely to be managed towards the higher end of this range. A significant number of departures at the most senior levels of management since the start of 2013 raise further questions over the ongoing autonomy of management.
Effective Incumbent Competitor
Telenet's TV penetration stands at 73% and is believed to command in the region of 75%-80% TV market share within its franchise area. Belgium incumbent, Belgacom, is nonetheless regarded as having done an effective job in developing its own TV product (reporting 26% TV market share at Q113) and multi-service customer base.
The Belgian regulator plans to impose cable unbundling which would force the company to offer either TV (analog or digital) or a bundled digital TV plus broadband, on wholesale terms. While any regulatory imposition is likely to be inconvenient and could prove detrimental, the exact nature and impact of any wholesale regulation on Telenet is unclear at this stage Fitch does not anticipate any material impact on Telenet's credit profile in the near term.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Net funds from operations (FFO) leverage expected to consistently trend above 5.5x - to apply whether driven by weakened operational performance - at present considered less likely - or the maintenance of high/excessive distributions.
- FFO fixed charge cover trending below 2.5x.
Positive: Future developments that may, individually or collectively, lead to negative rating action include:
- A firm commitment from both Telenet and Liberty Global that Telenet is committed to a more conservative leverage profile and distribution policy. This seems unlikely at present.
Instrument ratings are affirmed as follows:-
Telenet N.V. senior secured bank facility: 'BB'/'RR2'
Telenet Finance Luxembourg S.C.A. EUR500m due 2020: 'BB'/'RR2'
Telenet Finance Luxembourg II S.A. EUR100m due 2016: 'BB'/'RR2'
Telenet Finance III Luxembourg S.C.A. EUR300m due 2021: 'BB'/'RR2'
Telenet Finance IV Luxembourg S.C.A. EUR400m due 2021: 'BB'/'RR2'
Telenet Finance V Luxembourg S.C.A. EUR450m due 2022: 'BB'/'RR2'
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