Nov 7 - Fitch Ratings has affirmed Royal KPN N.V.'s (KPN) Long-term
Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'. The Outlook on
the Long-term IDR is Negative.
The affirmation is based on KPN's incumbent position in its domestic market and
its focus on preserving cash flow generation while facing intense competition.
The Negative Outlook reflects Fitch's concerns about the deteriorating trend in
revenue and profitability and rising leverage. KPN says it is on track to meet
its 2012 EBITDA guidance of EUR4.7bn-EUR4.9bn, which at the midpoint is 6.6%
lower than in 2011. In the 12 months to September 2012, EBITDA was EUR4.83bn
with net debt/EBITDA of 2.7x. A return to KPN's net debt/EBITDA target range of
2.0x-2.5x by year end of 2012 looks unlikely, according to Fitch's estimates.
The agency believes management's plan to stabilise KPN's core domestic business
involves execution risk, which along with macroeconomic headwinds, could keep
KPN's EBITDA and cash flow under pressure beyond 2012.
The challenge for KPN is to improve cash flow generation before it takes full
control of Reggefiber, KPN's joint venture to rollout a fibre-to-the-home (FTTH)
network in the Netherlands. Fitch acknowledges the strategic nature of this
fibre business to defend KPN's core fixed-line business against competition from
cable network operators. However, Fitch estimates that the full consolidation of
Reggefiber from 1 January 2014 (subject to regulatory approval) could increase
KPN's net debt/EBITDA ratio by as much as 0.35x by 2014 (including the 2017 put
liability which gives KPN 100% control of Reggefiber). Net debt/EBITDA
(including Reggefiber-related liabilities) exceeding 3.0x on a sustained basis
could lead to negative rating action.
KPN also faces the threat of new entrants in the Dutch mobile market. Mobile
spectrum auctions in the Netherlands started on the 31 October and the
regulator's decision to reserve blocks for new entrants is likely to increase
competition in Dutch mobile and continue to pressure KPN's EBITDA margin. Tele2
and Ziggo/UPC, which secured spectrum in the 2.6GHz band in 2010, are potential
Competition also remains intense in the fixed-line segment, where Dutch cable
network operators have together won four percentage points of broadband market
share in the last six quarters at the expense of KPN and the other DSL players.
KPN's TV product has been gaining TV market share, which is helping in the
battle for triple-play customers. Although KPN stabilised domestic residential
broadband market share in Q312, profitability remains under pressure.
KPN's leverage (including the Reggefiber liabilities) is already high for its
rating level. The company has taken various steps to reduce leverage this year,
including a significant reduction in shareholder remuneration. Fixed and mobile
network improvements as well as commercial investments are in progress to
improve the company's domestic market position, while KPN is halfway through the
headcount reduction programme it started in 2011. Fitch believes that KPN needs
to improve free cash flow generation on a sustainable basis to put the company
on a clear deleverage path. KPN's 2012 results and 2013 outlook will be key to
Fitch's assessment of the company's prospects. If negative EBITDA and cash flow
trends persist, in Fitch's opinion, KPN may have to consider asset disposals or
further dividend reductions to protect its credit profile.
WHAT COULD TRIGGER A RATING ACTION?
- An absence of improvement in domestic fixed and mobile operations
- An expectation that net debt/EBITDA (including Reggefiber-related liabilities)
could exceed 3.0x on a sustained basis could lead to a downgrade
Positive: The current Rating Outlook is Negative. As a result, Fitch's
sensitivities do not currently anticipate developments with a material
likelihood, individually or collectively, of leading to a rating upgrade.
Additional information is available at www.fitchratings.com. The ratings above
were unsolicited and have been provided by Fitch as a service to investors.
Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012 is
available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology