(The following statement was released by the rating agency)
Dec 20 -
-- In the nine months of 2012, the liquidity profile of Netherlands-based
holding company Magyar Telecom B.V. continued to weaken.
-- We anticipate that Magyar Telecom's liquidity sources will decline
substantially during 2013 and believe that the group's capital structure could
become unsustainable in the near term, heightening the risk of a distressed
-- We are lowering our long-term corporate credit rating on Magyar
Telecom to 'CCC' from 'CCC+', and revising our assessment of the group's
liquidity to "weak" from "less than adequate."
-- The outlook on Magyar Telecom is negative, reflecting our view that
the group's capital structure will likely become unsustainable in the next 12
On Dec. 20, 2012, Standard & Poor's Ratings Services lowered its long-term
corporate credit rating on Netherlands-based holding company Magyar Telecom
B.V. to 'CCC' from 'CCC+'. The outlook is negative.
At the same time, we lowered our issue rating on Magyar Telecom's EUR350 million
senior secured notes due 2016 to 'CCC' from 'CCC+'.
The rating action primarily reflects our decision to revise our assessment of
Magyar Telecom's liquidity profile to "weak" from "less than adequate" as
defined by our criteria. In our view, the group's liquidity is likely to
weaken further in 2013 primarily because we expect meaningful negative free
operating cash flow generation due to continued pressure on revenues and
margins in a challenging macroeconomic, competitive, and regulatory
environment. As a result, we believe that the group's capital structure could
become unsustainable in the near term, heightening the risk of a distressed
exchange offer, which we would view as a default under our criteria.
Magyar Telecom is the holding company of Invitel Tavkozlesi ZRt (Invitel),
which is the second-largest fixed-line telecommunications, cable-TV, and
broadband Internet services provider in Hungary.
In our base-case scenario, we expect group revenues in euros to decline by
about 13% in 2012 and by about 10% in 2013. In our view, Magyar Telecom's
revenues denominated in Hungarian forint (HUF) will remain constrained by
strong macroeconomic and competitive pressures. In addition, we assume that
the foreign exchange rate will deteriorate to HUF300 to the euro on average in
2013, compared with an average of about HUF290 in 2012 year to date. At the
same time, we expect the group's reported EBITDA to decline by about 23% to
EUR57 million in 2012 and to about EUR45 million in 2013, primarily due to lower
gross profits and the introduction of new taxes.
Due to the anticipated weaker EBITDA generation and continued meaningful
capital spending (capex), we forecast negative free operating cash flow (FOCF)
of between EUR20 million and EUR25 million in 2012, down from negative EUR14 million
in 2011. As a result, we expect Magyar Telecom's cash balances at year-end
2012 to decline to about EUR10 million to EUR15 million, which we believe will
offer the group limited ability to meet anticipated cash outflows in 2013, in
the absence of additional funding or sizable reductions in discretionary
The rating on Magyar Telecom B.V. reflects our assessment of the group's
financial risk profile as "highly leveraged" and business risk profile as
"weak." Our assessment of the group's management and governance is "fair."
The financial risk profile is constrained by the group's high leverage,
expectations of continued negative FOCF generation, our assessment of the
group's "weak" liquidity profile, and what we regard as a very aggressive
financial policy. Furthermore, the group is significantly exposed to foreign
exchange volatility in relation to the Hungarian forint. In our view, this is
only partly offset by the group's long-term capital structure, with no debt
maturities before 2016.
Magyar Telecom's business risk profile primarily reflects the fierce
competitive environment, the group's exposure to macroeconomic and regulatory
pressures in its domestic market, and continuing revenue declines at the
group's very profitable core voice business. These factors are partly offset,
in our opinion, by Magyar Telecom's solid market position and extensive
network as the former incumbent telecom operator in 14 concession areas in the
Republic of Hungary (BB/Stable/B).
We consider Magyar Telecom's liquidity to be "weak," as defined by our
criteria. We expect the ratio of the group's sources of liquidity to uses to
decline well below 1x in 2013.
We estimate Magyar Telecom's liquidity sources over the next 12 months from
Sept. 30, 2012, at about EUR40 million. These include:
-- About EUR29 million in available cash balances, as reported by the
-- Funds from operations of about EUR10 million.
We estimate Magyar Telecom's liquidity needs over the next 12 months to amount
to about EUR35 million-EUR40 million, primarily comprising capital spending and
modest cash needed to run the group's operations.
We currently don't factor in liquidity support from Magyar Telecom's owner,
private equity company Mid Europa Partners (not rated).
We see the group as significantly exposed to exchange rate volatility over the
long term, given the currency mismatch between its EBITDA and debt. We
understand from Magyar Telecom's management that the group has hedged the
foreign exchange risk on the coupon of its senior secured notes with standard
forward contracts until June 30, 2013.
The group faces no significant debt maturities until 2016 and does not have to
comply with maintenance covenants. However, the documentation of its senior
secured notes contains an incurrence covenant that limits the issuance of new
debt by Magyar Telecom to 3.5x total debt to EBITDA.
Magyar Telecom's EUR350 million (EUR326 million outstanding on Sept. 30, 2012)
9.5% senior secured notes due 2016 are rated 'CCC', the same as the corporate
At present, we consider the senior secured notes well secured because they
benefit from first-priority liens over bank accounts, receivables, and
intercompany loans, floating charges over the assets of the group's domestic
operations, as well as pledges over the entire share capital of the group's
domestic operations. In addition, we estimate that prior ranking liabilities
would not represent more than 15% of total adjusted assets.
Under our hypothetical default scenario, the group's capacity to meet
debt-service repayments could come under pressure from continued strong
erosion of its core voice fixed-line revenues, owing to increasing competition
from cable and fixed-line telecom operators, strong competitive pressure on
revenues from wholesale and business customers, the effects of a significant
economic downturn, and material weakening of the Hungarian forint against the
In the fast-moving technological environment, a fixed-line network might not
retain as much value as a mobile network. Nevertheless, the group has a solid
market share in its concession areas and extensive network coverage in
Hungary. We therefore assume that the network and subscriber base could still
be attractive for an alternative fixed-line, mobile, or wholesale operator. In
the event of default, lenders under the senior facilities should therefore
benefit from their secured position.
The negative outlook reflects our view that Magyar Telecom's liquidity will
likely further weaken over the next 12 months, given our forecast of
meaningful negative FOCF generation. As a result, we forecast that the current
capital structure could become unsustainable in the near term. We also see a
potential risk for a payment default on the interest coupon due in December
2013, absent additional funding from its shareholders or significant cuts in
We will likely consider a downgrade in the next six months if the group's
available cash balances continue to decline as a result of negative FOCF
The rating could stabilize if the group manages to curb the expected decline
in revenues and EBITDA and at the same time is able to generate at least
break-even FOCF. Although not anticipated at this stage, liquidity support
from Mid Europa Partners could also be positive for the rating.
Related Criteria And Research
-- Methodology: Management And Governance Credit Factors For Corporate
Entities And Insurers, Nov. 13, 2012
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Rating Implications Of Exchange Offers And Similar Restructurings,
Update, May 12, 2009
-- Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct.
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
Magyar Telecom B.V.
Corporate Credit Rating CCC/Negative/-- CCC+/Negative/--
Senior Secured CCC CCC+