(Repeat for additional subscribers)
Dec 20 (The following statement was released by the rating agency)
Fitch Ratings has revised UAB Bite Lietuva's (Bite) Outlook to Stable from Positive and
affirmed Bite's Long-term Issuer Default Rating (IDR) at 'B-'. At the same time Fitch has
affirmed Bite Finance International BV's (BFI) bonds at 'B-'. BFI's senior secured
revolving credit facility (RCF) has also been affirmed at 'B'/RR3.
KEY RATING DRIVERS
The Outlook revision reflects Fitch's view that the business is no longer likely
to deleverage as quickly as we previously thought. Guidelines previously set for
an upgrade including funds from operations (FFO) net adjusted leverage
approaching 3.7x - 3.8x are not expected to be achieved in 2014. The company's
operating performance and financial metrics, including the generation of
positive free cash flow mean that leverage is now expected to remain flat at
around 4.3x through 2014 and into 2015.
Challenging Operating Conditions
Bite operates in two mature, relatively small markets where economic conditions
are challenging. In both markets Bite competes against larger and more
financially secure operators with experience and the benefit of operations in
multiple countries. In both, Tele2 is the most disruptive, consistently setting
a price floor. While Bite has proven successful at positioning its brand
somewhere between the value proposition and the most expensive offer in both
markets, conditions in Lithuania through 2013 have proven more challenging than
expected, while termination rate cuts in April in both have had a significant
impact on revenues.
Lithuanian Momentum Stalled
Lithuania is by far Bite's largest market with the business generating revenues
and EBITDA of EUR135m and EUR39.7m respectively in 2012. Competitive pressures
and termination rate cuts have seen subscriber evolution stall and significant
top-line pressure through the second and third quarters of 2013. Net subscriber
losses, and revenues in the range of EUR120m - EUR122m are now expected by Fitch
for 2013. The commercial success of its product repositioning, including the
4Q13 launch of a separately branded low-end offer to compete more directly with
Tele2, will be important if revenues are to stabilise and subscriber growth
Stable Metrics, No Deleveraging
The change in the operating environment combined with margin pressures
associated with the increased commercial activity intended to drive subscriber
additions over the next several quarters, suggest that EBITDA is unlikely to
improve materially in 2014 and that unadjusted leverage (net debt / EBITDA) will
remain at around 4.0x. The company is generating positive free cash flow which
will improve the overall net debt profile. An unexpected tax ruling affecting
the deductibility of interest is being challenged in the courts. Assuming the
ruling is upheld however adds approximately 0.3x of leverage to forecast 2014
FFO net adjusted leverage resulting in a Fitch forecast metric of 4.3x, a level
that is not consistent with a higher rating.
Covenant Step-down, Low Headroom
The company's secured bank RCF includes a leverage covenant that steps down over
time, with the rate at which the test tightens through 2014 and 2015
anticipating progressively improving financial metrics. The slowdown in the
business in 2013 and the margin pressure associated with the commercial activity
(described above) expected over the next several quarters, are likely to put
pressure on covenant headroom. 2014 will be an important year in terms of
regaining operating momentum, with a further step-down in the covenant in 2015
making it important that commercial momentum feeds through to improving
financial performance in that year. Bite is generating positive free cash flow
and funded through 2018. Utilisation of the RCF is therefore not expected.
Fitch will continue to monitor covenant headroom closely, including potential
management efforts to loosen the test or otherwise ensure a breach under an
undrawn liquidity line should not undermine the integrity of the bonds (i.e.
trigger cross default).
Metrics Consistent with Rating Level
With the business generating positive free cash flow (when 2013 is adjusted for
the exceptional costs relating to its refinancing), the metrics outlined above,
along with forecast fixed charge cover in the region of 2.6x - 2.7x, support the
current rating level. The company's size and operating environment are
constraints on the rating with the degree to which a heightened competitive
environment, weaker than planned performance and factors like an unexpected tax
ruling, underlining the need for caution in the rating.
Negative: Future developments that could lead to negative rating action include:
- A failure to generate a positive free cash flow margin - our rating case
assumes this to be in the low to mid-single digit range
- Failure to stabilise and improve the subscriber profile in Lithuania
- Failure to address covenant headroom - through a renegotiation of the metric
step-down or otherwise.
- Persistently weakening leverage trend. A forecast FFO net adjusted metric of
4.3x provides headroom at the 'B-' level. A materially weaker metric and no sign
of the negative trend being addressed would be a concern.
Positive: Future developments that could lead to positive rating actions
- A difficult operating environment and the constraining factors described above
suggest an improvement in the rating is unlikely in the near to medium term.
- Solid improvement in operating performance in Lithuania, ongoing traction in
Latvia and an FFO net adjusted leverage of 3.8x or below could potentially
support a higher rating - this kind of leverage performance is not currently
envisaged in our rating case.