March 13, 2013 / 5:41 PM / 5 years ago

Fitch Assigns KPN's EUR/GBP Hybrid Securities Final 'BB'; Rates USD Tranche 'BB(EXP)'

(The following statement was released by the rating agency) LONDON, March 13 (Fitch) Fitch Ratings has assigned Royal KPN N.V.'s (KPN, 'BBB-'/Stable) proposed subordinated perpetual and long-dated capital securities a final rating of 'BB'. Fitch has also assigned KPN's planned USD long-dated capital securities an expected rating of 'BB(EXP)'. The final rating is contingent on the receipt of final documents conforming materially to the preliminary documentation. After issuing EUR1.1bn and GBP400m of capital securities, KPN intends to issue similar USD capital securities as part of its plan to raise EUR2bn equivalent of hybrid securities. The USD securities have similar terms to the EUR and GBP hybrid securities which are deeply subordinated and rank senior only to KPN's ordinary shares, while coupon payments can be deferred at the option of the issuer. As a result of these features, the 'BB(EXP)' rating assigned to the proposed securities is two notches below KPN's 'BBB' Long-term Issuer Default Rating (IDR), which reflects the securities' increased loss severity and heightened risk of non-performance relative to the senior obligations. This approach is in accordance with Fitch's criteria, "Treatment and Notching of Hybrid in Nonfinancial Corporate and REIT Credit Analysis" dated 13 December 2012 at www.fitchratings.com. The USD securities will also qualify for 50% equity credit like the GBP and EUR securities, subject to KPN's AGM on 10 April 2013 approving the company's EUR3bn rights issue. KEY RATING DRIVERS KPN's plans to strengthen its balance sheet show 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. - Muted Cash Flow Generation Fitch expects KPN's 2013 underlying EBITDA to be significantly lower than in 2012. 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. Improvements in operating free cash flow over the next few years will depend on how successful KPN is in stabilising its domestic position and taking market share in Germany. - Mobile New Entrant Threat KPN has managed to obtain good spectrum in the auction, which should help underpin the company's longer-term competitive position in the Dutch mobile market. However, Tele2 plans to launch the fourth mobile network in the Netherlands after purchasing an attractive 800MHz spectrum in the auction to complement its previously acquired 2.6GHz spectrum. This new entrant is likely to be intent on gaining market share, which could lead to increased price competition. - High Domestic Fixed-Line Competition Competition also remains intense in the fixed-line segment, where Dutch cable TV operators are the main threat. Although KPN stabilised domestic residential broadband subscribers in Q312, profitability remains under pressure. In response to the cable threat, KPN is upgrading its network through Reggefiber, KPN's joint venture to rollout a fibre-to-the-home (FTTH) network in the Netherlands. - Reggefiber liabilities 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. RATING SENSITIVITIES Negative: - Continued deterioration in KPN's domestic fixed and mobile operations - An expectation that net debt/EBITDA (including Reggefiber-related liabilities) could exceed 3.5x on a sustained basis could lead to a downgrade Positive: - Successful completion of the proposed EUR3bn 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. Contact: Principal Analyst Owen Fenton Associate Director +44 20 3530 1423 Supervisory Analyst Damien Chew, CFA Senior Director +44 20 3530 1424 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Stuart Reid Senior Director +44 20 3530 1085 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available at www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012 and "Treatment and Notching of Hybrid in Nonfinancial Corporate and REIT Credit Analysis" dated 13 December 2012 is available at www.fitchratings.com. Applicable Criteria and Related Research Corporate Rating Methodology here Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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