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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 billion, including:
-- 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 longer-maturity debt.
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