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Feb 18 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Israel-based B Communications Ltd. (B-Com) a Long-term Issuer Default Rating (IDR) of ‘B+’ with a Stable Outlook following a successful placement of USD800m of 7.375% senior secured notes due 2021. The notes have been assigned a final ‘BB-’ rating and Recovery Rating of ‘RR3’ upon receipt of final documentation conforming to preliminary information already received by Fitch.
B-Com is a holding company and the ultimate owner of an approximately 31% stake in Bezeq, an incumbent telecoms operator in Israel. B-Com depends on dividends from Bezeq as a core income stream for servicing its debt obligations.
Control over Bezeq
Fitch views B-Com’s 31% stake in Bezeq as sufficient for full operational and management control over the telecoms operator. Under Israeli law, a controlling shareholder in Bezeq must be pre-approved by the government. A 30% stake is defined as sufficient to apply for controlling shareholder status. It is a criminal offence for a single shareholder to accumulate more than 4.99% without prior approval by the government. This law provision effectively rules out the emergence of a large minority shareholder.
As Bezeq’s debt carries no financial covenants, the telecoms operator can, in theory, increase debt without restrictions and upstream any amount of dividends to B-Com. In practice, distributions above 100% net profit would require court approval, which may not be easily procured. Accounting asset write-downs could also impede the normal flow of dividends from Bezeq, but Fitch views the likelihood of this as low.
Limited Flexibility to Sell Assets
Given the legal requirements over controlling stakes, B-Com has limited flexibility to dispose of its stake in the market beyond 1%. However, any proceeds from a 1% stake sale are likely to be significantly below expected annual interest payments and negligible relative to the total size of B-Com’s debt obligations.
Bezeq’s Strong Credit Profile
Bezeq’s credit profile is consistent with the mid-‘BBB’ rating level, reflecting the company’s strong position as a telecoms incumbent in Israel. The company has been able to withstand facilities-based competition with the country’s only cable operator despite Bezeq’s premium pricing, and the prospect of further facilities-based competitive threats is remote. Bezeq’s EBITDA margin was strong at 45.3% for last 12 months-to-3Q13 on the back of next generation network efficiencies in the fixed-line segment. This high level of efficiency is sustainable and has been a key factor in mitigating severe pressures in the over-competitive mobile market, which consists of five operators. Regulatory intervention is a key threat in view of the company’s high fixed-line margins, which the regulator may challenge by fostering more competition, among other measures.
An acquisition of the remaining stake in Yes could be tolerated within the current rating if leverage after the transaction did not exceed 2.5x net debt/EBITDA.
Low Interest Cover at the Holdco Level
Both B-Com and its immediate parent Internet Gold (IG) have substantial debt with no recourse to Bezeq. Both entities ultimately depend on dividends from Bezeq as a core source of cash for servicing their debt obligations. Fitch views the amount of NIS1.7bn of dividends per annum from Bezeq as sustainable, despite likely continuing moderate revenue pressures at Bezeq. Based on this level of normalised dividends, pass-through proportional net debt/EBITDA at B-Com is likely to remain at 4.4x-4.5x (defined as B-Com’s net debt and 31% of Bezeq’s net debt/31% of Bezeq’s EBITDA) and interest coverage by dividends at slightly above 2x (defined as B-Com’s share in Bezeq’s dividends/B-Com’s interest payments) over the medium term.
No Ring-fence at B-Com Level
There is no ring-fencing mechanism around B-Com to prevent it taking on extra leverage or syphoning off cash. B-Com’s existing domestic bonds and the recently issued senior secured notes do not have any effective mechanisms limiting the leverage or payments from B-Com.
No Parent-Subsidiary Linkage
Fitch views the parent-subsidiary linkage between B-Com and its ultimate shareholder Eurocom Group as weak due to the presence of an intermediary holding company IG between B-Com and Eurocom and the fact that IG has its own debt. B-Com’s ratings do not reflect any potential support from the parent. IG reduced its interest in B-Com to 68% from 80% in 2013 and used the proceeds towards debt reduction efforts.
The USD800m senior secured notes are secured by a 30% interest that B-Com owns in Bezeq and benefit from a lock-box mechanism mitigating temporary disruptions in dividend flows from Bezeq and conserving some cash for debt repayment. In view of these features, the bond is rated one notch above the IDR.
Disruption or a reduction in normalised dividends from Bezeq to below NIS1,700m per annum and resultant deterioration in dividend/interest coverage to below 2x would be rating negative. Operating pressures and financial underperformance, coupled with higher leverage at Bezeq, could also be negative. A reduction in leverage to below 4.3x net debt/dividends (at B-Com-level only) and pass-through proportional net leverage to below 4x may be rating positive.