(The following statement was released by the rating agency)
June 29 -
Summary analysis -- Belgacom S.A. --------------------------------- 29-Jun-2012
CREDIT RATING: A/Stable/A-1 Country: Belgium
Primary SIC: Telephone
Mult. CUSIP6: 077701
Credit Rating History:
Local currency Foreign currency
02-Dec-2011 A/A-1 A/A-1
30-Jun-2009 A+/A-1 A+/A-1
The ratings on Belgium-based telecommunications operator Belgacom S.A. reflect Standard & Poor’s Ratings Services’ view of the group’s “strong” business risk profile and “modest” financial risk profile, as our criteria define these terms.
The ratings on Belgacom are supported by its position as the leading integrated provider of telecommunications services in Belgium, its full ownership of the country’s market-leading mobile operator Proximus, the steady growth of its data and bundled products, and its solid free operating cash flow (FOCF) generation. Belgacom’s credit quality also benefits from its prudent financial policy, illustrated by its leverage, which we view as moderate at 1.2x at the end of March 2012.
In our opinion, the ratings are constrained by continuing adverse regulatory measures that hamper Belgacom’s mobile telecoms operations, and heightened competition. The structural decline of more profitable fixed-line voice revenues owing to evolving technologies further impairs the ratings.
S&P base-case operating scenario
We anticipate that Belgacom’s overall business performance will remain sound in the coming year, supported by a successful execution of its fixed-mobile convergence strategy. Belgacom retains good growth opportunities in bundled products and mobile broadband in the consumer segment in our view. This combined with its ongoing network upgrade investments, should enable the group to maintain its clear market leadership positions.
That said, we expect the group to post mid- to low-single-digit revenue and EBITDA decline in 2012 and 2013, because of the impact of regulatory measures. Increasing spending for customer gains or retention, owing to heightened competition on bundled products from cable operators in an increasingly penetrated market, could also impair the group’s performance in our view.
Under our base-case scenario, we believe the group’s ongoing cost efficiency program will not sufficiently offset the impact of adverse regulatory changes and negative sales mix trends, resulting in a gradual erosion of EBITDA margin to 28% in 2013. In addition, we think the potential introduction of mobile handset subsidies to increase mobile data revenues could weigh negatively on the margins of Belgacom’s mobile phone division.
Belgacom faces ongoing adverse regulatory decisions. The regulator announced substantial mobile termination rate (MTR) and roaming rate cuts to be implemented progressively until 2013-2014. We believe, however, that the impact on EBITDA will be more limited than on revenues because Belgacom’s interconnection costs slightly exceed its interconnection revenues, and MTRs will become symmetrical from Jan. 1, 2013.
Belgacom posted broadly resilient performance in the first quarter of 2012, in our view, thanks to sustained growth in broadband and Internet protocol TV (IPTV) services and steady volume growth in international carrier services (ICS). The latter was largely offset in the first quarter of 2012, however, by the negative regulatory impacts, resulting in flat revenues of EUR1.6 billion.
S&P base-case cash flow and capital-structure scenario
Despite the various factors constraining its EBITDA, we see Belgacom continuing to display strong credit metrics, underpinned by sound profitability and robust free operating cash flow (FOCF) generation.
We expect the group to maintain sound financial flexibility in 2012, and project Standard & Poor’s adjusted debt to EBITDA of less than 1.5x at year-end 2012, compared with 1.2x at March 31, 2012.
In addition, discretionary cash flow (FOCF minus dividends) should remain slightly positive in 2012, which we consider a key support for the ratings. This is in line with the group’s dividend policy of not returning more cash than FOCF generation to shareholders.
The short-term rating on Belgacom is ‘A-1’. We assess the group’s liquidity as “strong,” under our criteria. On March 31, 2012, liquidity was supported by a cash balance of EUR515 million, our base-case forecast of robust FOCF generation of close to EUR750 million for 2012, and access to several undrawn long- and short-term committed credit facilities. We estimate that these facilities totaled about EUR865 million at the end of March 2012.
We believe that these cash resources provide Belgacom with good financial flexibility to face a small short-term debt burden of EUR35 million.
Management had announced stable dividend distribution for full-year 2011, and paid these dividends in the second quarter of 2012. In addition, we expect Belgacom to complete its EUR200 million share buyback program during 2012. Half of the program was completed in 2011.
We project that the group’s sources of liquidity, including cash and credit-line availability, will exceed its uses by 1.5x or more over the next 12 months. We expect Belgacom to maintain its current FOCF profile, and provided it does, we believe that it will not face liquidity concerns over the next 18 months.
The stable outlook reflects our view that Belgacom will maintain strong business positions in both the fixed-line and mobile telecoms segments in Belgium. Under our base-case scenario, we also believe that the group will likely continue to generate solid, sustainable FOCF in excess of EUR700 million in 2012, despite the underlying regulatory risks and competition associated with its operations. In addition, at this stage we anticipate that Belgacom will not distribute dividends that exceed FOCF, by our estimates, generated in 2012.
We will continue to monitor Belgacom’s financial discipline, ability to preserve sound EBITDA margins, and cash conversion, which are, in our view, core to the group’s SACP. We expect Belgacom to maintain adjusted debt to EBITDA below 2x, which we see as commensurate with the ratings.
A move by Belgacom to a more aggressive financial policy, a sustained weakening in the group’s business risk profile, or a deterioration in the group’s financial profile, as a result of a strongly unfavorable judgment relating to ongoing litigation, could prompt us to lower the ratings.
We are unlikely to raise the ratings on Belgacom in the future, given the strain we see on its business risk profile from competition and regulatory pressures.
Related Criteria And Research
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Industry Report Card: EMEA Telecoms, Cable, And Satellite Sector Credit Quality May Falter Slightly As Europe’s Economies Stay Glum, May 16, 2012