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Nov 7 (Reuters) - (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 in France.
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 time off.
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 medium-term.
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 rating.
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-'