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Jan 20 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings expects to assign Poland-based P4 Sp. z.o.o. (P4 or Play) a Long-term Issuer Default Rating (IDR) of â€˜B+â€™ with a Positive Outlook. The agency has assigned expected ratings of â€˜BB-(EXP)â€™/â€™RR3â€™ to the proposed senior secured notes to be issued by Play Finance 2 S.A. and â€˜B-(EXP)â€™/â€™RR6â€™ to the senior notes to be issued by Play Finance 1 S.A. Final ratings of the notes are contingent on the receipt of final documents conforming materially to the preliminary documentation.
The expected IDR assumes the successful completion of P4â€™s refinancing/recapitalisation activity, including the issuance of the expected senior secured and unsecured notes, repayment of existing bank debt (approximately PLN2.5bn) and the payment of a shareholder dividend of PLN1.3bn. P4 has proven a nimble and fast-growing challenger in the Polish mobile market, establishing itself as a strong brand, with an easily understood service message and competitive distribution network. Revenues and cash flows demonstrate strong growth, with the company exhibiting improving margins, albeit below market and positive (pre-distribution) free cash flow.
The rating is constrained by some uncertainty over future financial policy, the pace of growth, market position among competitors, and the currency mismatch of the proposed debt structure.
The Positive Outlook reflects Fitchâ€™s opinion that delivery of managementâ€™s planned 2014 budget would result in robust financial metrics for a â€˜B+â€™ rating. The evolution of the capital structure following the transaction (i.e. how closely the shareholders choose to manage leverage to covenant), continued rational development of the market and evidence that roaming agreements are largely insulated from material price inflation or renegotiation risk, could support a higher rating.
KEY RATING DRIVERS
Rational Market, Low Convergence Risk
Fitch views competition in the Polish mobile market as developed and well dimensioned with no single operator owning a disproportionate share of the market, while as the market challenger, Play has taken a measured approach to market share gains, product position and pricing. The agency considers that a population of 38 million people in a reasonably advanced economy can support a four player market and that the market structure is less likely to experience the kind of value-destructive price wars seen in some markets. The somewhat underdeveloped fixed telephony infrastructure and limited pervasion of traditional triple-play services, suggest an aggressive move to convergent fixed-mobile bundles is currently a limited medium-term risk.
Efficient Infrastructure Strategy
Play has developed an efficient approach to network coverage concentrating its own network infrastructure in more populous and urban areas, relying to a limited extent on roaming agreements, which currently exist with each of the other three main network operators. Data traffic is almost entirely carried on the companyâ€™s own network, while spectrum and planned LTE (next generation data technology) investment appear adequately provisioned relative to the competition. This hybrid asset-light approach allows for a lower level of capital intensity, in turn supporting an improving cash flow. While roaming agreements are entirely commercially negotiated, Fitch does not perceive a high degree of renegotiation risk given the current existence of multiple agreements.
Effective Commercial Approach
Play appears to have developed a consistent and well-communicated brand, seeking to be the mobile number porting destination of choice and has acquired customers on a relatively evenly balanced basis across the market (ie. without targeting any one particular competitor). Management appear conscious of the need not to be seen as a disruptive challenger, which could provoke a destructive price war.
Distribution channels (ie. the number of retail shops/distributors) among competitors appear evenly matched, which is important, given the absence of an independent distribution chain (ie. a Carphone Warehouse equivalent). Although virtual mobile network operators have been present in the market for a number of years, they have not proven overly disruptive.
Mature Competitive Market
As the smallest in a four player market in an emerging economy, Play has proven a nimble competitor and has grown quickly and consistently. The pace of growth will continue to require careful management while the presence of two large incumbent- owned multinational competitors â€“ Orange (BBB+/Negative) and T-Mobile (Deutsche Telecom; BBB+/Stable) â€“ provides financially strong and experienced competitors with the capacity to intensify the operating environment if they choose.
Financial Policy Evolving
Financial policies that allow leverage to remain somewhat high (incurrence tests of 4.25x net leverage; 3.0x net secured leverage and a restricted payment test limited at 3.75x net debt to EBITDA) and the currency mismatch of a predominantly euro-denominated debt structure and 100% domestic revenue base, are constraining factors for the rating.
POSITIVE:Any positive action would be subject to the continued rational behaviour of the market and that market share gains and other performance indicators are in line with Fitchâ€™s rating case. The shareholdersâ€™ approach to financial policy will also be important. With a potential IPO deemed a number of years off and the bonds incorporating a restricted payment test (set at 3.75x) Fitch expects recurring dividends to consistently re-leverage the balance sheet.
The level at which the shareholders choose to establish this, combined with continued operational performance will determine whether the financial profile supports a â€˜BB-â€˜ rating.
The following metrics would be important for an upgrade to be considered:
- Continued strong subscriber growth and an ongoing shift in the subscriber mix to postpaid customers, with subscriber acquisition cost and postpaid churn close to managementâ€™s expectations.
- EBITDA margin in the high 20s and EBITDA less capex margin in the high teens.
- A financial policy that is likely to see FFO net adjusted leverage managed at or below 4.0x, a level consistent with net debt/EBITDA of around 3.3x-3.4x.
A stabilisation of the rating at the current (â€˜B+â€™) level is likely if the competitive (pricing) environment intensifies, making revenue growth and margin expansion targets more challenging. An expectation that convergent services were deemed by the market to be a more important offering could also undermine the Positive Outlook.
A financial policy that included FFO net adjusted leverage consistently managed above 4.0x would be expected to stabilise the rating at â€˜B+â€™. In the absence of greater clarity on publicly stated financial policy from management/the owners, Fitch would not expect any positive rating action until a second dividend has been declared.
FULL LIST OF RATING ACTIONS
P4 Sp. Z.o.o. Long-Term IDR: Fitch expects to rate: â€˜B+â€˜; Outlook Positive
Play Finance 2 S.A. Senior Secured Notes: â€˜BB-(EXP)â€™/â€™RR3â€™
Play Finance 1 S.A. Senior Notes: â€˜B-(EXP)â€™/â€™RR6â€™