(The following statement was released by the rating agency)
Jan 28 - Fitch Ratings has assigned Bite Finance International
BV's (Bite Finance) proposed secured bonds due 2018 an expected rating of
'B-(EXP)'/'RR4'. At the same time the agency has assigned an instrument rating
of 'B(EXP)'/'RR3' to Bite Finance's super senior revolving credit facility and
affirmed UAB Bite Lietuva's Issuer Default Rating (IDR) at 'B-' with Positive
Outlook. Final instrument ratings will be assigned subject to a review of
The agency has also affirmed the group's existing debt capital as follows: Bite
Finance senior secured bonds maturing 2014 affirmed at 'B-'/'RR4;' and SIA EECF
Bella Finco super senior revolving credit facility affirmed at 'B'/'RR3.' These
ratings will be withdrawn upon completion of the proposed refinancing and
cancellation of these instruments.
The ratings take into account the steps management is taking to address
refinancing risk in 2014, and Fitch's expectation of solid free cash flow, which
will drive future improvements in leverage. The shareholder's decision to
refinance a EUR13m PIK note, currently outside the restricted group, along with
transaction fees, adds around 0.4x EBITDA to leverage. Bite will need to
continue to deliver results in line with recent performance to ensure this
effect dissipates relatively quickly. This increase in leverage will, in Fitch's
view, postpone the timing of a potential upgrade; something that now seems
unlikely in 2013.
In Fitch's view, the group's focus on cash flow generation accompanied by a
measured approach to the further development of its market position in Latvia
are the right strategic objectives for a business limited by small size, mature
markets and a tough competitive environment. Any downturn in the economy could
however affect deleveraging plans.
Key Rating Drivers
The company has EUR172m of outstanding senior secured bonds maturing March 2014,
and is currently in the process of refinancing these bonds along with a small
amount of bank debt (EUR5m) and EUR6m of its 2017 subordinated notes. Additional
funds raised will be used to take out a parent company PIK note and pay
transaction fees. While overall financing costs will rise, a successful
transaction will address refinancing needs that would otherwise have started to
pressure the rating as the year progressed.
- Leverage Profile
Unadjusted (net debt/EBITDA) leverage of 4.3x for 2011 was a sharp improvement
on the previous year. Fitch expects free cash flow performance to result in the
metric falling to around 3.7x by YE12 - pro- forma for the current transaction
approximately 4.1x. The company's target to reduce the metric below 3.5x
suggests a commitment to a conservative financial policy, albeit one that has
been impacted by the refinancing.
- Growth in Latvia
Bite has made solid progress in developing its subscriber base in Latvia since
2010. Management expects this momentum to continue into 2013. A shift in the
business mix to post-paid subscribers should continue to support blended average
revenue per user metrics and help manage churn rates. Subscriber acquisition and
retention costs - albeit characterised as customer loans - will need to be
managed carefully, with particular attention on the potential for bad debt to
increase in light of a movement away from subsidies.
- Challenging Operating Environment
Bite operates in two competitive markets, both of which have competitors
(TeliaSonera and Tele2 ) with scale and diversification. These markets are
mature and Bite is market number two in Lithuania and three in Latvia. Although its
position as the challenger in Latvia gives it the opportunity to take market
share from the incumbents, its competitors are both in a better position to
endure a period of sustained economic downturn, or, if they chose to, impose
aggressive pricing or otherwise disrupt the market.
RATING SENSITIVITY GUIDANCE:
Positive: Future developments that could lead to positive rating actions
- Latvian operations combining EUR45-50m in service revenue and EBITDA margin
20%, combined with a broadly stable performance in Lithuania.
- Successful refinancing of 2014 bonds.
- Financial leverage - FFO net adjusted leverage of 3.7x or below.
- Sufficient investments in 3G and successful modernisation of the 3G network in
Lithuania (3G coverage in line with management 2013 plan).
- Consistently positive free cash flow.
Negative: Future developments that could lead to negative rating action include:
- Stabilisation at the current level to reflect expectations the above criteria
are unlikely to be met by mid-2014.
- Failure to refinance the 2014 bonds by H213 would lead to a Negative Outlook
at a minimum.