(Repeat for additional subscribers)
Nov 7 (The following statement was released by the rating agency)
Fitch Ratings has revised Orange S.A.'s Long-term Issuer Default Rating (IDR)
Outlook to Negative from Stable. The Long-term IDR has been affirmed at 'BBB+'. A full list of
rating actions is at the end of this release.
Orange is taking steps to improve its operational performance in France and
other key markets, but its financial performance remains under pressure due to
the price reductions required to protect market share. With capex likely to
remain stable, Orange's credit profile and deleveraging capability depends very
much on its EBITDA progression in 2014 and 2015. The Negative Outlook reflects
Fitch's concerns that Orange's financial flexibility may be lower and leverage
higher than initially expected, especially if competitive intensity remains high
KEY RATING DRIVERS
Reduced Financial Flexibility
The Negative Outlook reflects the challenges Orange continues to face in its
domestic market, and to a lesser extent, the difficulties in Poland, the Rest of
the World segment and with its Enterprise business. Q313 results show that
Orange's revenue and EBITDA remain under pressure while capex is expected to
remain stable. Cost cutting progress this year has been solid, but Fitch
believes that continued efficiency gains may not be enough to offset revenue
declines if operating conditions deteriorate in 2014 and 2015. The EUR2bn
one-off tax payment Orange made in Q313 has also reduced financial flexibility.
Potential Increase in Leverage
Fitch's scenario analysis shows that under certain conditions, driven by a
continued weak domestic performance, funds from operations (FFO) adjusted net
leverage is expected to hit 3.3x at the end of 2013, partly due to the one-off
tax payment. This leverage metric could reach 3.5x either towards the end of
2014 or in 2015 - a level not compatible with a 'BBB+' rating. A slight decline
in group EBITDA in 2014 followed by continued improvements in 2015 would
underpin a credit profile more compatible with a 'BBB+' rating. Fitch analysis
shows that in certain scenarios Orange's EBITDA declines in 2014 may not be
limited to low single digit percentage and a stabilisation could still be some
Operating Performance Improving
Operational key performance indicators are showing a positive trend with strong
mobile subscriber net additions in France and Spain. Orange's fixed-mobile
bundled offers in various markets and domestic fibre services are gaining
traction. This has not translated into solid financial performance yet as these
improvements have been accompanied by significant tariff reductions.
Weak Cash Flow Generation
Network investments in its fibre and fourth generation mobile networks planned
by management to allow Orange to differentiate its service offering from the
competition means that capex is likely to remain stable in 2013 and 2014, even
as revenue and EBITDA remain under pressure. Restated EBITDA less reported capex
(both as defined by Orange) declined 14.5% in 2012 with a further fall of 12.8%
in H113. Fitch expects continued declines in H213 and 2014, and pre-dividend
free cash flow (before spectrum payments) is likely to remain below 10% over the
Still Some Room to Manoeuvre
Orange has a diverse portfolio of operating assets, of which some may be sold to
reduce leverage. Fitch has not factored into its calculations the potential
disposal of Orange's operations in the Dominican Republic or the potential IPO
of its 50% in EE, the UK mobile operator. If stabilising EBITDA takes longer
than expected, Fitch recognises that Orange's management have the option of
revising its investment plans and reviewing its shareholder remuneration policy.
Liquidity Not a Concern
Orange's liquidity remains healthy. At the end of 30 June 2013, Orange had
EUR5.9bn of cash and equivalents, and EUR6.5bn of undrawn credit facilities.
This is sufficient to cover upcoming bond, debt and lease repayments well into
2016. The company reported an average debt maturity (excluding hybrid and
perpetual convertible debt) of nine years.
- FFO adjusted net leverage trending towards 3.5x would lead to a downgrade.
- Group EBITDA declines of a mid-single digit percentage or worse in 2014, with
limited improvement in the trend in 2015 would also lead to a downgrade.
- Pressure on free cash flow, driven by continued EBITDA erosion, higher capex
and shareholder distribution, or significant underperformance in the core
domestic market and at other key subsidiaries may also be negative for the
The Outlook could be revised to Stable if the following factors materialise:
- EBITDA declines in 2014 limited to a low-single digit percentage followed by
continued improvements in 2015.
- Expectations of sustainable deleveraging with FFO adjusted leverage remaining
well below 3.5x
- Continued improvements in the domestic operating performance.
The rating actions are as follows:
Long-term IDR: affirmed at 'BBB+', Outlook revised to Negative from Stable
Short-term IDR: affirmed at 'F2'
Senior unsecured: affirmed at 'BBB+'/F2
Commercial Paper Programme: affirmed at 'F2'
Hybrid capital instrument (TDIRA): affirmed at 'BBB-'