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Dec 13 -
Summary analysis -- Cable & Wireless Communications PLC ----------- 13-Dec-2012
CREDIT RATING: BB/Stable/B Country: United Kingdom
Primary SIC: Communications
Credit Rating History:
Local currency Foreign currency
26-Mar-2010 BB/B BB/B
The ratings on U.K.-based telecommunications services provider Cable & Wireless Communications PLC (CWC) reflect Standard & Poor's Ratings Services' view of the group's "significant" financial risk profile and its "fair" business risk profile.
The "significant" financial risk profile primarily reflects the group's negative discretionary cash flow (DCF) over the past couple of years, owing mainly to large shareholder returns, and its sizable adjusted proportionate gross debt to EBITDA. It also reflects our concern that the group does not fully own its key assets (for instance in Panama, Bahamas, and Monaco), which leads to meaningful leakage of dividends to minority interests. However, these weaknesses are partly offset by CWC's control of the management of its key assets and the track record of subsidiaries steadily upstreaming dividends to CWC based on a long-established dividend policy. The group's solid operating cash flow generation provides further support to the financial risk profile. The "fair" business risk profile reflects our opinion that the group will continue to face a tough regulatory and competitive environment in its markets. We also consider that the group is moderately exposed to country risk, for example, in Jamaica. These negative factors are offset by the group's leading market positions in most of the markets in which it operates, solid profitability, and good geographic, product, and customer diversification.
CWC recently entered an agreement to divest its entire Monaco & Islands business--including 11 territories, with the main markets being Monaco, Guernsey, and the Maldives--for a total of $1,025 million. The completion and timing of the divestment is uncertain but assuming it takes place, we would still assess the company's business risk profile as "fair" despite CWC's lower diversification after the disposal. This is supported by our view of a neutral impact on profitability and country risk, with CWC remaining diversified across 19 markets. We would also maintain our "significant" financial risk profile assessment because our adjusted credit metrics for CWC would not be markedly affected. We understand that CWC could also divest its Macau operations, which could, however, lead us to reevaluate our business and financial risk profile assessments.
S&P base-case operating scenario
In our base-case scenario, we assume the disposal of most Monaco & Islands assets would take place in the current fiscal year ending March 31, 2013, with the exception of a 75% stake in Compagnie Monegasque de Communications SAM (CMC) that we understand would be divested later. We anticipate that revenues in the remaining markets--about 80% of CWC's current revenue base--would be broadly flat in fiscal 2013 and 2014. Following the divestment, we think consolidated revenues for fiscal 2014 (ending March 31, 2014) could decline by 20% compared with fiscal 2012 levels.
We also expect reported EBITDA margin to remain at current levels (31% for the six months to Sept. 30, 2012) because we think the divestment will have little impact on profitability: EBITDA margin for the Monaco & Islands business was 31.7% in 2011-2012, in line with group EBITDA margin of 31.3%. Post-divestment, we expect profitability to remain stable because potential pressure in Panama or challenging macroeconomic conditions in some markets could be offset by cost reduction (for instance CWC achieved a 7% headcount reduction in the Caribbean in the six months to Sept. 30, 2012).
S&P base-case cash flow and capital-structure scenario
In our base-case scenario, we expect adjusted consolidated debt to EBITDA at 2.3x-2.4x and adjusted proportionate debt to EBITDA at 3.7x-3.8x for CWC over the next two years. Our calculations assume CWC would receive $680 million in the current fiscal year and another $345 million in the following year. We anticipate CWC would use the proceeds to repay $330 million outstanding under the $600 million committed revolving credit facility (RCF) in the current fiscal year and a $50 million facility maturing in the following year. Our debt calculation includes our operating leases and pension adjustments but no longer incorporates the $250 million put option relating to Monaco Telecom, 55%-owned by CMC, because we assume CWC will divest its entire stake in CMC. We anticipate that the group's DCF will be slightly negative in 2012-2013 and 2013-2014. This compares with our previous estimate of positive DCF in 2013-2014, which had factored in the Monaco & Islands business contribution of about $100 million to reported cash flow after capital expenditures. However, we expect proceeds received from the divestment to strengthen CWC's cash position to $500 million-$550 million in March 2013 and likely further in March 2014. We do not net debt with any surplus cash because we believe cash could instead be used for possible acquisitions or returned to shareholders, depending on the outcome of a potential divestment of the Macau business. Absent significant reinvestment, we assume that CWC would seek to redeploy excess cash in a rating-neutral way.
The short-term rating on CWC is 'B'. We assess CWC's liquidity as "adequate" under our criteria. This reflects our view that the group's sources of liquidity will cover its uses by at least 1.2x for the 12 months to March 31, 2013.
As of March 31, 2012, we estimate CWC's liquidity sources over the following 12 months at about $2 billion. These include:
-- $312 million in consolidated cash and investments, of which we estimate about $195 million is available on a proportionate basis;
-- About $660 million that we forecast in funds from operations (cash flow before capital investments and working capital changes, and after interest and tax);
-- Access to a $600 million committed RCF maturing in October 2016, of which $270 million was undrawn on Sept. 30, 2012. The RCF includes financial maintenance covenants, under which we anticipate that CWC will maintain adequate headroom; and
-- $680 million for the divestment of the Monaco & Islands business.
We estimate CWC's liquidity uses over the same period to be about $1.4 billion, including:
-- Capital expenditure (capex) of about $350 million;
-- Our forecast of working capital outflows of about $40 million;
-- Financial liabilities of GBP200 million redeemed in August 2012 and our assumption that outstanding under the RCF will be fully repaid. Aside from $76 million of regional loans due over the next 12 months, there are no further debt maturities until October 2016, when the $600 million RCF matures; and
-- Dividends (including to minority interests) of approximately $340 million.
If the Monaco & Islands disposal did not go through, liquidity would still be adequate in our view.
The stable outlook reflects our view that CWC will maintain its leading market positions, EBITDA margin at the current level, and will not divest any other sizable operations. Additionally, we anticipate that DCF will be slightly negative over the next 12-18 months and that the group will maintain adjusted gross debt to EBITDA moderately above 3.5x on a proportionate basis (or less than 3.0x on a consolidated basis). At this point, we assume that any redeployment of disposal proceeds toward acquisitions would be compatible with CWC's current rating.
We could lower the rating if DCF remained negative for an extended period of time, or if management took a more aggressive attitude toward shareholder returns or mergers and acquisitions. Such a scenario would likely result in leverage exceeding the aforementioned levels that we deem commensurate with the rating. We could also lower the rating if CWC divested its Macau business because we think this would have a negative impact on our business risk profile assessment.
Rating upside in the near term is limited, notably by country risk and CWC's lack of full ownership of its key assets. A further constraint is the group's limited headroom under the leverage threshold that we deem commensurate with the current ratings.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008