Fitch: Pacnet's Growth Ambitions Limited by Weak Cash Flows

Tue Aug 26, 2014 5:07am EDT

(The following statement was released by the rating agency) HONG KONG/SYDNEY, August 26 (Fitch) Fitch Ratings says that although Pacnet Limited's (Pacnet; B/Stable) EBITDA improved in 1H14, cash flow from operations (CFO) and unrestricted cash balances are likely to be insufficient to fund its ambitions to significantly increase the size of its data centre business. To speed up the pace of expansion, Pacnet may need additional capital. While there is some headroom for additional debt at the current rating level, credit metrics would be protected if the company were to raise equity. Weak cash generation will remain a key constraint on Pacnet's ratings, as it competes with large telecommunications incumbents in its primary service offerings, such as international connectivity and managed data services. Cash receipts from new indefeasible right of use (IRU) sales are a key source of CFO but are unpredictable. Pacnet reported a USD4m CFO deficit in 1H14 due to limited cash receipts from new IRU sales in 1H14. Its unrestricted cash fell to USD30m at end-June 2014 - the lowest level in three years - from USD54m at end-2013 due to capital expenditure. While Fitch expects the continued robust growth in international data traffic to drive the demand for IRUs, there is low visibility in the timing of cash receipts from new IRU sales. In addition, IRUs have a long sale cycle, with legal contract work alone taking 3-8 months. That said, the company expects to conclude the first major IRU sale in 2014 in the next two months or so. The company aims for USD25m-50m in cash receipts from new IRU sales in 2014. The successful rollout and rapid take-up of its new data centre capacity are important to Pacnet's long-term strategy. We think that a more meaningful contribution from core data centres - those that are built, owned and operated by Pacnet rather than reselling of facilities - is likely to come in 2015 or 2016. To date, contribution from Pacnet's core data centres has been limited. In 1H14, core data centre revenue totalled USD5m, accounting for just 2% of Pacnet's total revenue. Pacnet's current cash-generation ability constrains its data centre ambitions. The company may need additional capital to further expand its Singapore and Hong Kong facilities when additional rack inventory is required. Data centres are increasingly viewed as a niche sub-sector of the real estate market. Demand for data services, assisted by internet traffic growth and cloud service computing requirements, has proven to be less correlated to the global economic downturn than other property asset classes, such as offices. Contact: Name Kelvin Ho Director +852 2263 9940 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Steve Durose Senior Director Deputy Head Asia-Pacific Corporate Ratings Group +61 2 8256 0307 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on 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.