(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 closing documentation.
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 These ratings will be withdrawn upon completion of the proposed refinancing and cancellation of these instruments.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.
Positive: Future developments that could lead to positive rating actions include:
- 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.