RPT-Fitch Revises Outlook on eircom to Stable; Affirms at 'B-'
Feb 28 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has revised the Outlook on eircom Holdings (Ireland) Limited's Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at 'B-'. At the same time, the agency has affirmed the instrument ratings of the company's secured bank debt and the senior secured notes issued by eircom Finance Limited at 'B'/'RR3'.
The revision of the Outlook reflects Fitch's view that eircom has made progress in delivering the operational transformation set out by management 18 months ago. Nonetheless, significant challenges remain and the company's leveraged financial profile is inconsistent with the wider European incumbent telecom sector where significant revenue pressures continue. Progress in terms of the company's fibre build, the launch of LTE mobile services, and its TV and quad-play product launch, put the company in a stronger position to compete in Ireland's crowded telecoms market, while the financial performance is in line with management's expectations.
An improved operating profile and progress in meeting cost reduction targets provide greater assurance of eircom's ability to generate positive free cash flow (FCF) in fiscal 2015. Fitch's rating case envisages net debt to EBITDA leverage will peak/stabilise at around 4.7x in FY14, before more meaningful FCF generation should start to delever the business from 2016. This profile is consistent with a Stable Outlook in the context of a 'B-' rating given the company's operational profile.
KEY RATING DRIVERS
Rating Case Improving
Year-on-year revenue trends remain weak, although this partly reflects the base effects of the accelerated declines reported in 2013. Revenue and market share trends have begun to ease, while the scale of network improvements and wider product offering, position the company more competitively. Fitch's rating case, while still envisaging revenue declines over the next two years, also expects the company to generate positive FCF in fiscal 2015 (by June 2015) with peak leverage lower than previously forecast.
Operational Transformation on-Track
In Fitch's view, operational performance has been healthy against the objectives set for the company over the past 18 months. eircom's fibre build has so far passed 700,000 homes and is now broadly comparable in reach to UPC's (bi-directional) cable network. While operating metrics remain under pressure, this is common among European incumbents and they are within the targets previously set by management. In addition, cost savings are being delivered and EBITDA is stabilising. eircom has acquired 4G spectrum and rolled out LTE services quickly, while planned improvements in the postpaid mix are supporting margin recovery in mobile.
Fibre Investment and Quad Play
Roll-out efficiencies have enabled management to increase its targeted fibre build to 1.4 million premises and 70% of the population to be delivered by June 2016, without adding to the capex budget. The fibre network enables eircom to offer iPTV services which were launched in October 2013making eircom the only quad- play offer currently in the market. It will now be important for the company to position its TV and quad-play offers in a way that appeals to the consumer without prompting aggressive competitor actions in an increasingly crowded fixed line market.
Operating Environment Evolving
Both fixed line and mobile markets are evolving, with competition in the fixed line market intensifying in 2013 following the launch of triple-play (TV, broadband and voice) services by Sky at the start of the year. Ireland is a highly penetrated pay-TV market with 70% of TV homes taking some form of pay TV. With both cable operator UPC and Sky pushing triple-play, the launch of the incumbent's iPTV product is important. Fitch believes the potential consolidation of the mobile market to three network-based operators, if Hutchison Whampoa's acquisition of O2 Ireland gains regulatory clearance (outcome expected in April), could benefit the wider market in the near term given the integration challenges faced by a newly merged, albeit larger, competitor.
Revenue Pressure Remains
An important part of the recovery plan was the target of reducing headcount and materially improving efficiency. From a base of approximately 5,100 full-time employees at FY12, headcount management is on track to reach a planned 3,500 by December 2014. Fitch considers management is broadly on-track to meet opex savings of EUR100m by 2015. Revenue pressures nonetheless remain, with management's expectations of return to growth in 2015, which in Fitch's view, is a challenging target given an economy that remains constrained by austerity, high unemployment and weakened private consumption. Western European incumbent businesses in materially stronger economies remain challenged to grow top-line revenues.
Positive: Future developments that could lead to positive rating action include: FFO net leverage trending towards 5.0x - roughly equivalent to 4.5x net debt to EBITDA leverage, combined with a solid high single digit FCF margin.
Negative: Future developments that could lead to negative rating action include: A 2015 FFO net adjusted metric that was trending towards 6.5x would likely lead to a downgrade.
Fitch would likely assign a Negative Outlook if unadjusted leverage was trending above 5.0x (FFO net leverage of c. 5.5x), given that revenue and cash flow trends would not be stabilising as envisaged by our rating case.
Generation of positive FCF in FY15 is an important milestone, the absence of which would increase downward rating pressure.
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