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Fitch Rates Global Cloud Xchange's USD350m Bond Final 'BB+/RR1'
July 29, 2014 / 8:36 AM / 3 years ago

Fitch Rates Global Cloud Xchange's USD350m Bond Final 'BB+/RR1'

(The following statement was released by the rating agency) SINGAPORE/SYDNEY/HONG KONG, July 29 (Fitch) Fitch Ratings has assigned GCX Limited's USD350m 7% senior secured notes due 2019 a final rating of 'BB+' and a Recovery Rating of 'RR1'. The final rating follows the receipt of documents conforming to information already received, and is in line with the expected rating assigned on 14 July 2014. GCX Limited is a wholly owned subsidiary of Global Cloud Xchange Limited (GCX; B+/Stable). GCX's notes are secured by the assets and equity interests of GCX and its key subsidiaries, and guaranteed by GCX and its key operating subsidiaries. The note proceeds will be used to fully repay its existing USD250m shareholder loan from its immediate parent, Reliance Globalcom B.V (RGBV), ultimately owned by Reliance Communications Limited (Rcom), India's fourth-largest telecom service provider by revenue market share. Part of the proceeds will also be used, together with a working capital bank loan, to finance capex related to its submarine cable networks. GCX's debt will now comprise of the USD350m notes, a proposed USD30m working capital loan and capital leases of USD45m. KEY RATING DRIVERS High Entry Barriers: GCX's ratings factor in its position as the owner of one of the world's largest private undersea cable systems, with 68,698km of cables and a 83,432km terrestrial cable network. There are significant barriers to entry for potential competitors. These include high capital intensity, long lead times to build undersea cables, limited availability of rights of way, and complex and lengthy processes - both regulatory and commercial - before revenue can be achieved. Industry Oversupply: Fitch Ratings expects GCX's operating EBITDAR margin to be around 25%-27% during the financial year ending March 2015 (FY15) through to FY17 (FY14: 27%) due to tariff declines as the industry remains oversupplied and intensely competitive. Industry capacity gains should consistently outpace fast-growing data demand as newer technologies allow for significant capacity upgrades. Fierce competition could also hit GCX's "indefeasible rights of usage" (IRU) sales, hurting liquidity and cash generation. Strong Revenue and Cash Visibility: As at end-March 2014, GCX had about USD912m (1.8x of FY14 revenue) in contracted revenue to be recognized in the next three years. GCX has high revenue visibility because over 80% of its revenue is recurring in nature, backed by medium- to long-term contracts with its customers. However, there is a risk of lower profitability with new customer contracts in the future because the undersea cable business typically faces double-digit percentage price erosion each year, and existing customers could switch to a lower-priced network service provider at the time of contract renewal. Generally Positive FCF: The Stable Outlook on GCX's ratings reflects its ability to generate positive free cash flows (FCF). Fitch expects GCX to generate FCF of around USD10m-20m after capex of around USD50-60m each year during FY15-18, except in FY16 when it plans to increase its capex to USD100m to build two new undersea cables - India-Singapore and Tokyo-Seattle. Fitch forecasts GCX to generate annual EBITDA of around USD130m during FY15-16. Related Party Transactions: Fitch rates GCX on a standalone basis, as we believe that GCX has weak legal, operational and financial linkages with its ultimate parent, Rcom. The agency also believes that cash flows are ring-fenced within the GCX group by the restrictive dividend and asset-sale covenants in its USD350m senior secured note documents, which limit GCX's ability to pay cash to the parent. Furthermore, the parent's plan to dispose of 50% of its stake in GCX and the presence of a new management team is likely to result in GCX operating as an independent entity. GCX was incorporated in March 2014, combining three entities: Flag Telecom (undersea cable business), Yipes Inc (ethernet services) and Vanco (managed services). Prior to restructuring, the group had significant related-party transactions, mostly with its immediate parent RGBV and ultimate parent Rcom. However, most of the related-party balances have been netted off during the course of restructuring (balance USD250m, to be settled via the bond proceeds), and new management is in place to run the group independently of its parent. Better Leverage; Small Size: GCX's FY15 forecast funds flow from operations (FFO)-adjusted net leverage of 3.5x is better than similarly rated peers mainly because it is forecast to pay lower dividends compared with its peers and due to its ability to generate positive FCF. Compared with GCX, Level 3 Communications Inc (B+/Stable) and Pacnet Limited (B/Stable) are likely to have higher leverage at 5.0x and 4.0x in 2014 respectively. Pacnet is of the same size as GCX while GCX's size and scale are much smaller than Level 3's (FFO of over USD1bn) with an average estimated FFO for FY15-16 of below USD100m. Adequate Recovery on Proposed Bond: Fitch has assigned a 'BB+' and 'RR1' rating, three notches above the IDR, on the newly issued USD350m 7% senior secured guaranteed bond. The bond is guaranteed by all the key operating companies, which generate most of group revenue and EBITDA. The 'RR1' Recovery Rating reflects our calculations of at least a 91% recovery in a stressed situation - based on our assessment of the distressed going-concern enterprise value of GCX's cable networks. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Sustained negative FCF generation - A deterioration in the operating environment and/or evidence of the parent accessing cash from GCX and negatively affecting GCX's credit profile resulting in FFO-adjusted net leverage rising to over 4.0x (FY15-16 forecast: 3.5x). - FFO interest charge coverage falling below 3.0x, both on a sustained basis. (FY15 forecast: 3.2x). - A downgrade could also result if judgement in outstanding litigation in France requires GCX to pay USD82m of taxes. Positive: Although an upgrade is unlikely in the next 12-18 months, future developments that may, individually or collectively, lead to positive rating action include: - Consistent generation of positive FCF. - A substantial increase in scale and absolute EBITDA generation. - FFO-adjusted net leverage falling below 2.5x on a sustained basis. Contacts: Primary Analyst Nitin Soni Director +65 6796 7235 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec City Tower 4 Singapore 038986 Secondary Analyst Kelvin Ho Director +852 2263 9940 Committee Chairperson Matt Jamieson Senior Director +61 2 8256 0366 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, "Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage", dated 28 May 2014 are available at www.fitchratings.com Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here 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.

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