(The following statement was released by the rating agency)
-- Polish telecommunications operator Telekomunikacja Polska S.A. (TPSA)
is facing significant operating challenges in its mobile unit owing to
increased competition and regulatory actions, including the reduction of
mobile termination rates.
-- Consequently, we have revised downward our base-case forecast on TPSA
and anticipate a potentially meaningful deterioration in the company's credit
metrics over the next 12-18 months.
-- We are therefore revising our outlook on TPSA to negative from stable
and affirming the 'BBB+' long-term corporate credit rating on the company.
-- The negative outlook reflects the possibility of a downgrade over the
next 18 months if TPSA's adjusted leverage increases to more than 2x, with no
short-term deleveraging prospects.
On Nov. 16, 2012, Standard & Poor's Ratings Services revised its outlook on
Polish telecommunications operator Telekomunikacja Polska S.A. (TPSA) to
negative from stable. At the same time, we affirmed our 'BBB+' long-term
corporate credit rating on the company.
The outlook revision follows a downward adjustment to our base-case operating
scenario for TPSA to reflect intensified competition in its core mobile unit.
We forecast that a combination of a decline in EBITDA, weaker discretionary
cash flow generation, and potentially meaningful cash outflows on spectrum
acquisitions may lead TPSA's credit metrics to deteriorate to levels that are
not commensurate with our assessment of TPSA's financial risk profile as
"modest" and our current 'BBB+' rating on the company.
TPSA has revised its guidance and outlook for 2012 due to its operating
environment deteriorating faster than it expected. We anticipate an even more
significant fall in revenues in 2013 than in 2012, because of significant
downward price pressure on mobile voice call prices. This is due to a
combination of regulatory actions, including a mandatory cut in mobile
termination rates (down 65% in the year to July 2013), and an increasingly
competitive environment in the post-paid and pre-paid mobile segments.
We also anticipate that the ongoing decline of public switch telephone network
(PSTN) lines and consequently, of average revenues per user (ARPU), will
continue. We also assume that growing subscriber acquisition costs on account
of increasing smartphone sales, declining mobile ARPUs, and a decline in PSTN
lines will more than offset the positive effect of a fall in interconnection
costs and other cost efficiencies. We therefore estimate that TPSA's EBITDA
margin will fall further in 2013. Overall, this leads to a meaningful decline
in reported EBITDA under our base-case scenario for 2013.
We anticipate that free cash flow could fall further in 2013, before one-off
payments for spectrum acquisitions, compared with PLN2.4 billion in 2011 and
management's guideline of PLN1.5 billion-PLN1.6 billion in 2012. This is
despite our assumption that TPSA will reduce its recurring annual capital
expenditures (capex) following the decline in broadband investments. We also
assume that TPSA will reduce dividend distributions, following management's
announcement of a drop in the 2012 cash distribution to PLN1 per share,
leading to break-even to slightly negative discretionary cash flows before
spectrum payments. We therefore forecast that TPSA's Standard &
Poor's-adjusted leverage will increase to about 1.7x in 2012 and that adjusted
FFO to debt will decline to about 55%. We think that adjusted leverage may
potentially increase to more than 2x in 2013, depending on the extent of the
decline in EBITDA decline, cash outflows for spectrum acquisitions, and
offsetting actions by TPSA.
TPSA is about 50% owned by the French telecom incumbent France Telecom
(A-/Negative/A-2). We currently assess TPSA's business risk profile as
We view TPSA's liquidity as "adequate" under our criteria. We forecast that
the ratio of internal liquidity sources to uses will be more than 1.2x over
the next six months, but will potentially fall to less than 1.2x in 2013. Our
assessment of TPSA's liquidity as "adequate" also relies to a large extent on
our expectation of support from its parent company, France Telecom. This could
take the form of France Telecom providing financial support in order to
support one-off cash outflows on items such as spectrum acquisition.
As of Sept. 30, 2012, we estimate that TPSA's total liquidity sources over the
next 12 months will amount to PLN4.2 billion-PLN4.7 billion, including cash on
balance sheet of PLN473 million and long-term undrawn credit facilities.
We estimate that TPSA's liquidity needs over the same period will amount to
PLN4.2 billion-PLN4.5 billion before spectrum payments and including debt
maturities of PLN930 million.
The negative outlook reflects the possibility of a one-notch downgrade over
the next 18 months if TPSA's adjusted leverage increases to more than 2x, with
no short-term deleveraging prospects. This could be the case if EBITDA
declines at a meaningful rate in 2013 and if TPSA spends several hundred
million of zlotys on spectrum acquisition without significant offsetting
We could downgrade TPSA to 'BBB' if we revise downward our assessment of its
financial risk profile to "intermediate" from "modest," alongside a
"satisfactory" business risk profile. We view adjusted leverage of 2.0x-2.5x
and FFO to debt of 35%-40% as consistent with an "intermediate" financial risk
We could revise the outlook to stable if TPSA's operating performance is
significantly better than our base-case scenario for 2013. We could also
stabilize the outlook if TPSA takes active steps to reduce its debt, resulting
in adjusted leverage of less than 2x and adjusted FFO to debt of more than 40%
on a sustainable basis.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
Portal, unless otherwise stated.
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Methodology and Assumptions: Recognizing The Settlement Obligation For
Foreign-Currency Hedges Of Debt Principal, April 15, 2010
-- Key Credit Factors: Methodology And Assumptions On Risks In The Global
High Technology Industry, Oct. 15, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- Corporate Criteria--Parent/Subsidiary Links; General Principles;
Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating
Link to Parent, Oct. 28, 2004
Ratings Affirmed; CreditWatch/Outlook Action
Telekomunikacja Polska S.A.
Corporate Credit Rating BBB+/Negative/-- BBB+/Stable/--
Senior Unsecured Debt BBB+
TPSA Eurofinance France S.A.
Senior Unsecured Debt* BBB+
*Guaranteed by Telekomunikacja Polska S.A.
(Caryn Trokie, New York Ratings Unit)