RPT-Fitch Affirms SES at 'BBB', Outlook Stable
Dec 16 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Luxembourg-based satellite operator SES SA's Long-term Issuer Default Rating (IDR) at 'BBB' and Short-term IDR at 'F2'. The Outlook is Stable. A full list of rating actions is below.
SES is one of the leading global satellite operators, generating highly visible cash flow and protected by relatively high barriers to entry. More capital is being deployed in the industry, which Fitch expects will lead to increased supply in some regions and some pricing pressure. With the benefit of economies of scale and initiatives to reduce the average capital cost of transponders, SES should be able to manage this change in competitive dynamics and keep its credit profile within the limits of a 'BBB' rating.
KEY RATING DRIVERS
Highly Visible Revenue Streams
SES's rating is underpinned by highly visible, non-cyclical and geographically diverse revenue streams, supported by long-term contracts (which can be up to 10-15 years) and by its solid underlying demand drivers. These include the increasing capacity requirements associated with a growing number of high-definition TV services, and increasing demand for direct-to-home satellite services in emerging markets.
Commitment to Maintain Leverage
SES is committed to maintaining its unadjusted net debt/EBITDA below 3.3x even as the company continues to invest for growth. Fitch considers a ceiling of 3.3x consistent with a 'BBB' rating for a business with SES's profile, giving the group an appropriate level of headroom under the 3.5x net debt/EBITDA covenant contained in its US private placement. Net debt/EBITDA was 3.0x at the end of 3Q13.
Regional Pricing Variations
Strong customer demand, especially in emerging markets, is attracting capital and the deployment of additional satellites from both global and regional satellite operators. This could lead to an oversupply of capacity and weaker pricing. SES needs to manage pricing carefully to take into account these regional variations in supply and demand. SES also has to manage profitability as average revenue per transponder in emerging markets is likely to be lower than in developed markets. To protect longer-term profitability, SES has introduced initiatives to reduce the average capital cost of transponders.
High Barriers to Entry
Access to the orbital slots needed to operate a geosynchronous satellite is limited and the most desirable orbital slots rarely change hands, forming a key industry barrier to entry. This should provide SES with some protection against excessive pricing pressures.
Few Medium-term Threats
The stability and long-term nature of the satellite industry means that significant changes in SES's risk profile are unlikely over the next three to five years. Potential industry challenges over the longer term are primarily technological (substitution by terrestrial fibre networks or more efficient transponder use than predicted), which could reduce demand. Widespread satellite failure across the fleet could have negative implications for the company's financial profile and rating, but this is mitigated by SES's large fleet and significant unutilised transponder capacity (74% utilisation rate as at 30 September 2013).
Healthy Cash Flow Outlook
Fitch expects cash flow from operations (CFO) to remain stable over the medium term, underpinned by the high (over 80%) EBITDA margin in the infrastructure segment, which accounted for 79% of group revenue (before eliminations) in 9M13. However, SES's free cash flow (after dividends) margin is expected to close to 0% in 2013 and 2014, according to Fitch's conservative assumptions as the majority of pre-dividend FCF is paid out as dividends.
Liquidity Not a Concern
SES's liquidity remains healthy. At the end of 30 June 2013, SES had EUR666m of cash and equivalents, and EUR1.2bn of undrawn credit facilities. SES also issued a EUR500m 1.875% five-year bond in October. This means SES has enough liquidity to meet its upcoming debt maturities in 2013 and 2014.
- The stability and long-term nature of the satellite industry makes significant changes in SES's risk profile unlikely in the three- to five-year rating horizon. This stable operating environment means that Fitch could tolerate expectations of unadjusted net debt/EBITDA reaching 3.3x before considering a negative rating action.
- Pre-dividend free cash flow margin consistently below 10% would indicate deterioration in the business, which could lead to negative rating action.
- SES's rating is constrained at 'BBB' by its current leverage policy. While there would be potential for upward migration if this policy was tightened, Fitch currently has no expectation that this will occur.
The rating actions are as follows:
Long-term IDR: affirmed at 'BBB', Outlook Stable
Short-term IDR: affirmed at 'F2'
Senior unsecured: affirmed at 'BBB'
Commercial paper: affirmed at 'F2'
SES Global Americas Holding GP
Senior unsecured: affirmed at 'BBB'.
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