Feb 5 - Fitch Ratings says that Royal KPN N.V.'s (KPN,
'BBB-'/Stable) announced EUR4bn rights issue to strengthen its balance sheet
shows that the company is committed to maintaining its investment grade profile.
However, Q412 results show that the company continues to operate in a
challenging environment. Fitch does not expect KPN's operating free cash flow to
recover significantly in 2013 and 2014.
Intense competition continues in the Dutch telecoms market, which could be
exacerbated by the expected new mobile entrant, Tele2. A weak macroeconomic
backdrop is negatively impacting KPN's Dutch corporate and IT segment, while
increased price competition and regulatory pressure is resulting in lower
revenue growth in Germany.
Despite lower EBITDA, Fitch expects capex to remain around 2012 levels as KPN
continues to upgrade its networks to maintain its leading position in the
Netherlands and to boost growth in Germany.
KPN ended 2012 with a net debt/EBITDA ratio (including Reggefiber-related
liabilities, excluding gains from disposals) of 3.2x. A successful rights issue
would allow KPN to continue to invest without being constrained by the current
high level of leverage.
Fitch downgraded KPN to 'BBB-'/Stable on 17 Dec 2012 following the conclusion to
the Dutch spectrum auction. This rating action did not factor in any action by
the company to strengthen its balance sheet. Successful completion of the
proposed EUR4bn rights issue would result in KPN's leverage falling below the
key 3.0x threshold. To consider positive rating action, Fitch would also want to
see clear evidence that there is a sustained improvement in KPN's domestic fixed
and mobile operations.
Reggefiber, KPN's joint venture to rollout a fibre-to-the-home (FTTH) network in
the Netherlands, is a key part of KPN's strategy to compete against the
triple-play threat from the Dutch cable companies. KPN could own 100% of
Reggefiber by 2017 (after the exercise of two options, subject to regulatory
approval) which leads us to include all of the Reggefiber-related liabilities
when assessing KPN's credit profile. These liabilities include the exercise of
options to buy the 49% of Reggefiber that KPN does not own, and the shareholder
loans and external financing incurred to support the FTTH network rollout. By
end-2014, when KPN might have to fully consolidate Reggefiber, Fitch estimates
these liabilities could amount to around EUR2bn, including the contingent
liability from the last option exercisable as of 2017.
Additional information is available at www.fitchratings.com.