(The following statement was released by the rating agency)
Dec 21 - Fitch Ratings has revised the Outlook on UAB Bite Lietuva's (Bite)
Long-term Issuer Default Rating (IDR) to Positive from Stable.
The agency has also affirmed SIA EECF Bella Finco's senior secured revolving
credit facility (RCF) at 'B'. The facility's Recovery Rating is 'RR3'. The
senior secured notes due 2014 issued by Bite Finance International BV have been
affirmed at 'B-'. The notes' Recovery Rating is 'RR4'.
The Positive Outlook takes into account the steps management are taking to
address the refinancing risk in 2014, and an expectation of solid free cash flow
performance which will in turn drive a moderately improving leverage profile.
Focus on cash flow generation and deleveraging accompanied by a measured
approach to the further development of the group's market position in Latvia
are, in Fitch's view, the right strategic objectives for a business that is
limited by its small size, mature markets and a tough competitive environment. A
successful outcome to its refinancing initiatives and delivery of the agency's
forecast expectations for 2013 should provide support for a potential upgrade.
Key Rating Drivers
- Growing Operations in Latvia:
Bite has made solid progress in developing its subscriber base in Latvia over
the past two years, momentum that management expect to continue into 2013. A
shift in the business mix to post-paid subscribers should continue to support
blended ARPU metrics and help manage churn rates. Subscriber acquisition and
retention costs - albeit characterised as customer loans - will need to be
managed in a continued growth phase and it remains to be seen whether management
can succeed in efforts to reduce/stabilise the negative working capital trends
that this business model generates. The potential for escalating bad debt in the
event of a further economic downturn will need to be monitored given the change
in the handset model.
- Growing Cash Flows:
Free cash flow has developed well over the past two years with the company
generating a free cash flow margin of 9.4% in 2011 - a metric which is strong
for the rating level. While handset related working capital investments have
resulted in this metric coming under pressure in 2012, a low single digit metric
and scope to expand the metric in future years, points to an ongoing ability to
- Improving Leverage Metrics:
Unadjusted (net debt / EBITDA) leverage of 4.3x for 2011 was a sharp improvement
on the previous year with free cash flow performance in the current year likely,
in Fitch view, to result in the metric falling comfortably below 4.0x in 2012.
The company's target to reduce the metric below 3.5x in 2013 highlights a
commitment to a conservative financial policy, something that should help in
management's objectives to refinance the 2014 bond. Fitch's rating case suggests
a metric that should be around 3.7x to 3.8x in 2013; a level that is strong for
the current ratings and supports the Positive Outlook.
- Need to Refinance Bonds:
The company has EUR171m of outstanding senior secured bonds maturing in March
2014, representing the mainstay of the company's debt capital. Fitch expects
management to take action early in 2013 to address this maturity with discussion
suggesting the company is exploring opportunities both in the bank and secured
bond markets. A successful refinancing of the bonds in H113 will be seen as a
validation of management's strategy by the credit markets, and represent a
materially positive event in terms of support for the Positive Outlook and key
step in any eventual upgrade. A poor market reaction or market conditions that
obstructed a successful transaction will inevitably weigh on the rating, the
significance of which will grow in importance as the maturity of the bonds gets
- Challenging Operating Environment
Bite operates in two competitive markets, in both cases against competitors
(TeliaSonera and Tele2) with scale, diversification and a stronger financial
position. Its markets are mature and Bite is positioned in both, as the market
number three by a considerable margin. While being positioned as the challenger
provides the opportunity to take share from the incumbents, its competitors are
both in a much stronger position to endure a period of sustained economic
downturn or if they chose to do so, to propagate a sustained period of
aggressive pricing or otherwise disrupt the market. LTE spectrum auctions in
2013 are an outlying risk, a cost that has proven in some markets to have been
unexpectedly high, and risk that could increase capex pressures.
- Small Size, Limited Flexibility:
The degree to which the economy affected Bite in the 2007 - 2009 downturn
demonstrated the constraints its limited size and market position can exert on
the company's operating and financial profile; effects that were felt far less
sharply by its larger competitors given their inherently stronger operations and
the diversification within their businesses.
RATING SENSITIVITY GUIDANCE:
Positive: Future developments that could lead to positive rating actions
- Latvian operations combining EUR45-50m in service revenue and EBITDA margin
20%, combined with a broadly stable performance in Lithuania
- Successful refinancing of 2014 bonds
- 2013 financial leverage - FFO net adjusted leverage - consistent with Fitch's
rating case of 3.7x or below
- Sufficient investments into 3G and successful modernization of 3G network in
Lithuania (3G coverage in line with management 2013 plan)
- Consistently positive free cash flow
Negative: Future developments that could lead to negative rating action include:
- Stabilisation at the current level to reflect expectations the above criteria
are unlikely to be met by mid-2014.
- Failure to refinance the 2014 bonds by H213 would lead to a Negative Outlook
at a minimum.
(Caryn Trokie, New York Ratings Unit)