The "significant" financial risk profile primarily reflects our view of SES'
weak free operating cash flow (FOCF) and discretionary cash flow (DCF)
generation (which we expect to strengthen over the coming years) and the
group's moderate financial flexibility under its U.S. private placement and
syndicated facility covenants. It also reflects our assessment of the group's
financial policy as commensurate with the current ratings, as well as the high
degree of predictability of a return on investments in satellites, despite the
large associated capital expenditures (capex).
S&P base-case operating scenario
We forecast moderate revenue growth of about 2% (on a constant currency basis)
for 2012, in line with the group's guidance. We anticipate that SES' revenue
growth will accelerate toward mid-single digits in 2013 and 2014, thanks to
the contribution from the recent satellite launches and planned launches over
the next 18 months. We also forecast that the reported group EBITDA margin
will remain stable over the same period, close to the 73.5% it reported in
2011. Despite the weak economic environment, particularly in Europe, the
group's strong order backlog and six satellite launches planned by the end of
2014 support our forecast.
A key assumption in our forecast is that SES' transponder utilization rate
will decline in the near term, before reverting back to historical levels of
about 80%. This was evidenced in the first half of 2012, when the group-level
utilization rate declined to 77.0% from 80.7% on June 30, 2011, and 79.1% at
year-end 2011. This initial decline is largely due to the gradual switch-off
of analogue transmission in Germany since April 2012, which is somewhat offset
by new contracts for direct-to-home TV. Furthermore, we estimate that the six
currently scheduled satellite launches, as well as two successful launches in
2012 to date, should result in a 19% rise in capacity from the level reported
on Dec. 31, 2011. Nevertheless, we believe that continued demand for video and
data signal transmission services, particularly from emerging markets, will
broadly absorb most of the new satellite capacity that SES is planning to add
over the next several quarters. In particular, high definition (HD) TV demand
together with SES' slow but steady inroads into the satellite broadband market
will continue to support revenues and earnings in the medium term.
S&P base-case cash flow and capital-structure scenario
For 2012 and 2013, we anticipate that SES' Standard & Poor's-adjusted
debt-to-EBITDA ratio will begin to decline to less than 3.0x. On June 30,
2012, SES' adjusted leverage was 3.1x, down from the high of 3.2x reached on
Dec. 31, 2011, as a result of a peak in capex. SES' reported unadjusted net
leverage also declined to 3.07x at June 30, 2012, from 3.12x at the end of
2011, leading to improved headroom under the group's public leverage target of
3.3x net debt to EBITDA--or about 3.5x as adjusted by Standard & Poor's.
Our base-case forecast for 2012 and beyond is supported by our assumption of
continued strong underlying generation of funds from operations (FFO) and
lower satellite investments. The group currently anticipates that its
investments will reach about EUR730 million in 2012, down approximately EUR100
million relative to the 2011 peak in the investment cycle. Investments should
continue to fall in the following years, resulting in a strong improvement in
FOCF and DCF generation. We also see SES returning to positive DCF in 2013,
from a slightly negative level in 2012.
Our short-term rating on SES is 'A-2'. We assess the group's liquidity as
"adequate" under our criteria. This reflects our assessment that the group's
liquidity will cover its uses by at least 1.2x for the next 12 months. Our
assessment also assumes that SES will actively refinance debt maturities of
about EUR0.7 billion in 2013, and EUR0.8 billion in 2014.
As of June 30, 2012, we estimate SES' liquidity sources over the next 12
months to be about EUR2.3 billion. These sources include:
-- Cash and cash equivalents of EUR239 million;
-- Our forecast of FFO of about EUR1 billion; and
-- A EUR1.2 billion senior unsecured committed revolving credit facility
maturing in April 2015, under which we estimate EUR200 million was drawn as of
June 30, 2012. The facility includes a financial covenant under which we
project SES will maintain adequate headroom, although we expect it to remain
slightly below 15% at the end of 2012 due to the peak in investments. However,
we foresee an improvement in headroom in subsequent years. In addition, we
take comfort from the strong visibility in earnings and investments over the
medium term derived from the strong order backlog. This, in turn, provides
high visibility on leverage and covenant headroom.
We estimate SES' liquidity needs over the same period to be about EUR1.7
-- Our forecast of capex of about EUR780 million;
-- Financial liabilities of roughly EUR700 million due over the next 12
months, including about EUR100 million in commercial paper; and
-- Likely shareholder distributions of approximately EUR380 million.
SES' access to its EUR1.2 billion revolving facility is important in our
liquidity assessment, as we forecast the group's DCF to be modestly negative
in 2012, and to only improve from 2013 onward due to a decline in satellite
investments. SES' discretionary cash generation (post dividend distributions)
is unlikely to be sufficient to cover its debt maturities over the next couple
of years, ignoring any plans by the group to refinance maturing debt with
The stable outlook reflects our view that SES will continue to benefit from
moderate revenue growth and stable EBITDA margins over the next two years.
This view is supported by significant visibility provided by the group's
revenue backlog and sustained demand for its core satellite services. The
outlook also takes into account our assumption that SES' financial policy of
maintaining unadjusted reported net debt to EBITDA of 3.3x will result in
adequate credit measures for the rating. We view adjusted debt to EBITDA of
less than 3.5x as commensurate with the 'BBB' rating, assuming the group's
business mix remains unchanged.
We could consider a downgrade if SES adopts a more aggressive financial policy
or if leverage materially exceeds the group's 3.3x target--in particular
resulting in tight headroom under its 3.5x net debt-to-EBITDA financial
covenants. A substantially weaker operating performance, or a failure to
return to positive DCF over the next two to three years, could also cause us
to take a negative rating action.
Although we anticipate that FOCF and DCF will begin to strengthen over the
next two years as capital investment levels decline, we see limited upside to
the ratings. The key limiting factor is the group's financial policy,
including its current leverage and dividend growth targets, which will limit
the group's deleveraging potential. However, if the group revised its
financial policy such that adjusted leverage was less than 3x on a sustainable
basis, then we could consider an upgrade.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
Portal, unless otherwise stated.
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008