Feb 5 (The following statement was released by the rating agency)
Fitch Ratings has assigned Arqiva Financing plc's
GBP164m fixed rate Series 2014-1 notes a 'BBB' rating with Stable Outlook, in
line with Arqiva Financing plc's existing notes. A full list of Arqiva's notes'
ratings is at the end of this release.
With the issuance proceeds, Arqiva has refinanced GBP162.5m of Finco term loan
A, leaving GBP57.5m of the term loan outstanding. An index-linked swap (ILS)
overlay has also been put over the existing (super senior) ILS to switch the
six-month LIBOR payment back to a fixed rate payment, in line with the fixed
rate Series 2014-1 notes.
KEY RATING DRIVERS
The ratings reflect Arqiva's continued solid operating performance to date, with
EBITDA over the past five years growing at a compounded annual growth rate
(CAGR) of 7.7% with FY13 (financial year ending June 2013) EBITDA reaching
GBP416.6m (and growing year-on-year by 3.8%). The EBITDA margin has also
continuously improved to 50.8% from 37.9% between FY08 and FY13. The ratings
also reflect Arqiva's gain of new long-term secured contracts, notably with
smart metering until 2028 (with potential for renewal) and two new HD TV muxes
(group of broadcast channels) until at least December 2018 (bringing the current
total of digital terrestrial television (DTT) muxes licensed to Arqiva to four
out of eight), and lower operating costs than previously assumed in Fitch's base
case with a reduced muxes licensing cost, namely administrative incentive
pricing (AIP), down to minimal levels of approximately GBP400,000 per annum
until 2020 and on average by 50% to around GBP20m per annum thereafter.
Arqiva recently also refinanced GBP180m of Finco term loan A on 17 January 2014
with the issuance of a private institutional term loan (ITL), which ranks
pari-passu with the secured Finco/senior borrower loans and the WBS
issuer/senior borrower loans. Fitch expects the remaining Finco term loan A
(GBP57.5m) to be refinanced prior to June 2014, which corresponds to the loan's
trigger date for a 50% cash sweep.
In September 2013, Arqiva signed a 15-year GBP625m contract (with a renewal
option for another five years) to provide the smart metering (remote reading of
meters) for the northern region (one of three designated UK regions). Arqiva
will develop, manage and roll out the network to about 9 million Comms Hubs
across homes and small businesses. The contract is owned by a subsidiary of
Arqiva, which is ring-fenced from the securitised WBS group. However, the latter
is expected to capture over 80% of the revenues with the subsidiary effectively
having back-to-back servicing agreements with the WBS group and a guarantee from
the Holdco (Arqiva Broadcast Holdings Ltd). The Comms Hubs are financed
separately through another vehicle, which is also ring-fenced from the WBS
Fitch's analysis included assessing how quickly the transaction's debt levels
reduce to compensate mid- to long-term revenue risks. These could arise, for
example, from potential funding issues (e.g. with cuts from both public and
private customers of DTT or radio broadcasting networks) or/and threats from
alternative technology (such as IPTV), for instance, lowering the demand for DTT
viewing, with key stress points culminating at the contracts' renewals. Fitch's
base case factors in these risks and assumes some stresses in satellite and
radio revenues in the medium term with low single digit growth, and below
inflation increases in revenues for both the digital platform and wireless
towers divisions (with nominal stresses at renewal of key contracts).
Based on Fitch's base case (which considers Arqiva's new business developments
and no refinancing of the remaining term loans), the relatively rapid
deleveraging profile continues to bring some comfort despite being slightly
slower than previously. This is compensated to a large extent by the recent
long-term business contracts that have been signed. The longer-dated ITL and
proposed Series 2014-1 notes, with expected maturities in December 2023 and June
2030, respectively (vs. February 2016 for Finco term loan A), and full cash
sweep thereafter until final maturity dates in February 2038 and December 2037,
respectively, still allows senior net debt to EBITDA leverage to reduce from a
maximum of 6.0x in FY14 to low levels of around 0.6x between FY27 and FY30 (vs.
0.2x previously). This deleveraging profile is largely driven by the cash sweep
amortisation features of both the remaining approximately GBP843.5m Finco term
loans and the GBP350m Series 2013-1a notes, and the heavy amortisation schedule
of the GBP398.5m Series 1 and 2 notes.
The junior debt leverage is in line with Fitch's last review, and therefore
still commensurate with a 'B-' rating, reducing under Fitch's base case
(assuming a generic refinancing scenario) from 7.3x in FY14 to below 6.7x in
2020 (at maturity of the HY notes), only marginally mitigating refinancing risk.
The junior debt remains therefore highly speculative as it is also deeply
subordinated and exposed to dividends pay-out disruptions from the WBS group
(which could trigger their default).
Fitch's synthetic base case debt service coverage ratios for the senior bonds
are at around 1.5x for the next 15 years and 1.7x for the next 20 years. Given
the expected deleveraging and comfort from the short- to medium-term cash flow
generation, these levels are deemed adequate. However, lower ratios could be
viewed negatively given the higher (long-term) obsolescence risk of Arqiva's
underlying technology compared with other WBS transactions with the same rating.
The transaction continues to benefit from strong structural features, especially
for the senior debt, including a solid security package, a full suite of
performance-related cash lock-up triggers, and untypical cash sweep mechanisms
(notably for the Finco term loans, the Series 2013-1a and 2014-1 notes, and the
ITL, which are features not usually seen in UK WBS transactions with the
exception of CPUK Finance Ltd). The transaction's structure also differs from
typical WBS transactions in that the debt-issuing vehicles are not orphan SPVs.
However, given structural protections in the transaction's legal documentation,
the potential conflicts of interest (due to the non-orphan status of the SPVs
and their directors also being directors of other group companies) are deemed
remote and consistent with the notes' ratings.
An unforeseen change in regulation (by Ofcom) with regard to any changes in its
pricing formulas (for DTT or radio broadcasting), licensing costs (e.g. AIP) or
even spectrum allocations could hit Arqiva's future cash flow and impact the
ratings. In addition, the risk of alternative and emerging technologies (such as
IPTV) could threaten Arqiva's revenues either through technology obsolescence
risk and/or lower ad-pool available to linear TV content providers. This risk is
currently mitigated by potentially the fast deleveraging of the transaction
(assuming cash sweep amortisation) and the long-term contracts securing
SUMMARY OF CREDIT
The transactions are the refinancing of senior and junior bank debt of Arqiva
Financing No.1 and No. 2 Limited through the issuances of GBP1,313m of WBS
notes, GBP180m of institutional term loan (ITL), plus GBP843m of Finco term
loans (the underlying WBS issuer/senior borrower loans ranking pari-passu with
the underlying secured Finco/senior borrower loans and the ITL), and GBP600m of
structurally subordinated HY notes. The remaining Finco term loans are expected
to be refinanced under the WBS programme.
Arqiva's operations consist of its ownership of UK's terrestrial TV & radio
broadcasting infrastructure, wireless towers and satellite transmission
services. Arqiva benefits from typically secured long-term contracts with
customers of mainly strong credit profile, and high barriers to entry with
monopolistic positions in key communications infrastructure segments notably in
UK DTT and radio broadcasting, all under the regulation of UK-based Ofcom, and a
dominant position in the wireless towers sector with 25% market share.
Arqiva's ratings are as follows:
Arqiva Financing plc (whole business securitisation (WBS) issuer):
GBP164m 5.340% Series 2014-1 notes (WBS) due 2037: assigned 'BBB', Stable
GBP350m 4.040% Series 2013-1a notes (WBS) due 2035: 'BBB'; Stable Outlook
GBP400m 4.882% Series 2013-1b notes (WBS) due 2032: 'BBB'; Stable Outlook
Arqiva PP Financing plc (WBS issuer - US Private Placement (USPP)):
USD358m (GBP235.5m equivalent) Series 1 guaranteed secured senior notes (WBS)
due 2025: 'BBB'; Stable Outlook
GBP163m Series 2 guaranteed secured senior notes (WBS) due 2025: 'BBB'; Stable
Arqiva Broadcast Finance plc (High Yield (HY) issuer):
GBP600m 9.500% senior notes (HY) due 2020: 'B-'; Stable Outlook