(Repeat for additional subscribers)
Jan 20 (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
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
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
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€™