Fitch Rates Pacnet's 2018 US Dollar Notes Final 'BB/RR1'

Tue Jan 7, 2014 8:56pm EST

(The following statement was released by the rating agency) HONG KONG/SYDNEY/SINGAPORE, January 07 (Fitch) Fitch Ratings has assigned Pacnet Limited's (Pacnet; B/Stable) USD350m senior secured guaranteed notes due 2018 a final rating of 'BB/RR1'. The assignment of the final rating follows the completion of the bond issuance and receipt of documents conforming to the information previously received. The final rating is in line with the expected rating initially assigned on 10 June 2013 and restated on 25 November 2013 prior to re-marketing of the bonds. The 'RR1' Recovery Rating on the notes reflects Fitch's recovery calculation for the notes of at least 90%, and therefore, under our recovery rating methodology, the bonds are rated three notches higher than the Issuer Default Rating (IDR). The notes are subordinated to any future debt raised at non-guarantor subsidiaries. However, Fitch understands that the company has no plans to raise such funds. The notes are jointly and severally guaranteed by all of Pacnet's main income-generating subsidiaries. Non-guaranteeing subsidiaries comprised 8% of the company's assets as of September 2013 and generated negative EBITDA in 2012. KEY RATING DRIVERS Smaller Scale, Intense Competition: Low profitability, strong competition from better capitalised market participants, weak financial position and high execution risk of its data centre strategy will continue to constrain Pacnet's ratings. Pacnet competes with large telecoms incumbents in its primary service offerings, such as managed data connectivity solutions. The scale of Pacnet's data centre operations is also smaller than rivals' in its key markets. Substantial Execution Risk: Fitch expects further improvement in Pacnet's EBITDA to be slow in the next few quarters and there is considerable execution risk associated with the newly completed and currently planned data centres in Singapore, China, Hong Kong and Korea. Contribution from its internet data centres, which it builds, owns and operates, has been limited so far. Successful execution and rapid take-up of new internet data centre capacity are critical to the company's long-term strategy. Negative FCF Persists: Fitch expects Pacnet's free cash flow (FCF) to remain negative for at least the next two years, due to investment in data centres, and funds flow from operations (FFO)-adjusted net leverage to remain over 4x for the next 18 months (2012: 4.5x). However, both maintenance capex and committed capex are low and therefore Pacnet has flexibility to manage its cash requirements should internal funds need to be retained, as the company has demonstrated in the past. Restructuring Showing Results: Fitch acknowledges that the restructuring in late 2012 has enabled Pacnet to refocus on core businesses and streamlined its cost structure. In the first nine months of 2013, Pacnet's reported EBITDA, adjusted for share option compensation, restructuring costs, early payment discount from a vendor, foreign exchange gains and other gains, rose 28% yoy to USD82m, which was in line with our expectation. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - FFO-adjusted net leverage rising to over 5x and FFO fixed charge coverage falling below 2x (2012: 2.0x), both on a sustained basis Positive: Future developments that may, individually or collectively, lead to positive rating action include: - FFO-adjusted net leverage falling below 4x, and FFO fixed charge coverage rising above 2.5x, both on a sustained basis Contact: Kelvin Ho Director +852 2263 9940 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Nitin Soni Associate Director +65 6796 7235 Committee Chairperson Steve Durose Senior Director +61 2 8256 0307 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, "Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage", dated 5 August 2013 are available at www.fitchratings.com Related Research "Rating Telecom Companies", dated 9 August 2012 Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Rating Telecom Companies here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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