Fitch Rates P4 Sp. z.o.o. 'B+'/'BBB-(pol)'; Assigns Final Ratings to Bonds

Tue Jan 28, 2014 10:51am EST

(The following statement was released by the rating agency) LONDON, January 28 (Fitch) Fitch Ratings has assigned Poland-based P4 Sp. z.o.o. (P4 or Play) a Long-term Issuer Default Rating (IDR) of ‘B+’ and National Long-Term Rating of ‘BBB-(pol)’ with Positive Outlooks. Fitch has also assigned final ratings of ‘BB-’/’RR3’/’BBB(pol) to the senior secured notes issued by Play Finance 2 S.A. and ‘B-’/’RR6’ to the senior notes issued by Play Finance 1 S.A. Fitch notes subscription of the notes resulted in an increase in the overall size of the company’s financing activity with approximately EUR900m of proceeds raised. The shareholder dividend/distribution is now expected to be around PLN1.43bn compared with Fitch’s previous expectations of PLN1.3bn. The increase is not considered material to the ratings. 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 Fitch’s opinion that delivery of management’s planned 2014 budget would result in robust financial metrics for a ‘B+’ 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 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 company’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 – Orange (BBB+/Negative) and T-Mobile (Deutsche Telecom; BBB+/Stable) – 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. RATING SENSITIVITIES 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 Fitch’s rating case. The shareholders’ 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 ‘BB-‘ 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 management’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. NEGATIVE: A stabilisation of the rating at ‘B+’ 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 ‘B+’. 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: assigned ‘B+‘; Outlook Positive P4 Sp. z.o.o. National Long-Term Rating: assigned ‘BBB-(pol)’; Outlook Positive Play Finance 2 S.A. Senior Secured Notes: assigned ‘BB-’/’RR3’ Play Finance 2 S.A. Senior Secured Notes National Long-Term Rating: assigned ‘BBB(pol)’ Play Finance 1 S.A. Senior Notes: assigned ‘B-’/’RR6’ Contact: Principal Analyst Slava Bunkov Associate Director +7 495 956 9931 Supervisory Analyst Stuart Reid Senior Director +44 20 3530 1085 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chair Michael Dunning Managing Director +44 20 3530 1178 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. 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