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TEXT-S&P rts Com Hem prpsd EUR250M PIK nts 'CCC+' with '6' recovery
November 13, 2012 / 10:26 AM / in 5 years

TEXT-S&P rts Com Hem prpsd EUR250M PIK nts 'CCC+' with '6' recovery

At the same time, we assigned our ‘CCC+’ issue rating to the proposed EUR250 million payment-in-kind (PIK) notes to be issued by the Com Hem group’s holding company NorCell 1B AB (publ). The recovery rating on the proposed notes is ‘6’, indicating our expectation of negligible (0%-10%) recovery in the event of a payment default.

The proceeds of the proposed notes will be used to fully repay the existing PIK notes issued by NorCell 1B AB (publ) and the related fees and expenses, and to repay existing shareholder loans.

Rationale

The ratings on NorCell 1B AB (publ) reflect our assessment of the group’s “highly leveraged” financial risk profile and “satisfactory” business risk profile.

Our assessment of the company’s “highly leveraged” financial risk profile reflects a heavy debt burden. We anticipate that Com Hem will only modestly reduce debt and generate moderately positive free operating cash flow. Furthermore, Com Hem faces intense competition from various technology platforms in multidwelling areas. Com Hem notably competes with large integrated incumbent TeliaSonera AB (A-/Stable/A-2) and other players using several alternative technologies, mainly digital subscriber lines and fiber networks.

Our assessment of Com Hem’s business risk profile is supported by the group’s established position, with its connections to 1.75 million households providing a stable utility-like basic analog TV subscriber base, and solid positions in digital TV, fixed broadband, and telephony markets. The company also has good growth opportunities owing to increasing penetration in its coverage area of digital TV and associated services (such as video on demand) and a shift to higher broadband speeds. Additional supports include the healthy Swedish economy and Com Hem’s superior network, which offers Internet speeds of 200 megabits per second in 90% of its coverage area.

The rating also benefits from the group’s long-dated capital structure, with limited debt amortization until 2018, and adequate liquidity.

Liquidity

We assess Com Hem’s liquidity as “adequate”, as defined in our criteria, since the completion of the group’s new capital structure. From our estimates, Com Hem’s sources of liquidity are likely to represent at least 1.2x uses over the next two years.

The key liquidity sources are:

-- Access to a SEK500 million revolving credit facility maturing in 2017, of which SEK445 million was undrawn as of June 30, 2012.

-- Access to an undrawn SEK750 million capital-spending facility until 2014.

-- FFO exceeding SEK1 billion per year, even after about SEK1.1 billion in annual cash interest payments. We anticipate that FFO could increase gradually to SEK1.3 billion in 2014.

We anticipate the following liquidity uses:

-- Capital expenditures of about SEK0.9 billion per year.

-- Small annual debt amortization requirements: about SEK0.3 billion in 2013, 2014, and 2015.

Recovery analysis

The proposed EUR250 million PIK notes to be issued by NorCell 1B AB are rated ‘CCC+', two notches below the issuer rating on NorCell 1B AB and Com Hem. The recovery rating on these notes is ‘6’, indicating our expectation of negligible (0%-10%) recovery prospects for the note holders in the even of a default.

The senior secured term loans issued by Com Hem AB and NorCell Sweden Holding 3 AB(publ) and the senior secured notes issued by NorCell Sweden Holding 3 AB(publ) are rated ‘B’. The recovery rating on this debt is ‘3’ indicating our expectation of meaningful (50%-70%) recovery prospects for senior secured lenders in the event of a default.

The issue rating on the senior unsecured notes issued by NorCell Sweden Holding 2 AB(publ) and guaranteed by NorCell Sweden Holding 3 AB(publ) is ‘CCC+'. The recovery rating on these notes is ‘6,’ indicating our expectation of negligible (0%-10%) recovery prospects in the event of a default.

We consider the proposed PIK notes to have a weaker position and weaker potential recovery than the existing senior unsecured notes as they are structurally and contractually subordinated to the existing senior unsecured notes.

The recovery and issue ratings on the secured debt are underpinned by our valuation of the company as a going concern in the event of a payment default and by Com Hem’s incorporation in Sweden, a jurisdiction that we view as “relatively favorable” to secured creditors. Conversely, we regard the security package as somewhat weak because it does not include a pledge over the network, substantial parts of which Com Hem leases and does not own. This, in our view, limits the recovery prospects for secured lenders, despite recovery prospects nominally higher than 70%. We see low recovery prospects for the unsecured notes due 2019 because of their subordination to a high proportion of prior-ranking secured debt. The proposed PIK notes will be contractually and structurally subordinated to both the existing senior secured and senior notes.

Our simulated default scenario envisages default in 2015, due mainly to intensifying competition and customer migration from cable to other technologies. Our going-concern valuation yields a stressed enterprise value of about Swedish krona SEK8.4 billion, equivalent to a stressed EBITDA multiple of 5.5x.

Outlook

The stable outlook reflects our belief that Com Hem will continue to generate modest revenue growth, sustain its market positions, and slightly reduce its adjusted leverage over the next two years, while generating positive and increasing free operating cash flow.

We could take negative rating actions if Com Hem’s leverage increased or if liquidity became tighter. This could be the case if revenues did not grow as we expect, resulting in FOCF being too tight to cover scheduled debt amortizations. We could also lower the ratings if adjusted debt to EBITDA materially exceeded 8x on a sustained basis or if FFO to adjusted debt fell to less than 5%.

Near-term ratings upside is unlikely, in our view, because we do not expect adjusted gross debt to EBITDA to fall to less than 6x in the near future.

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.

-- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers’ Speculative-Grade Debt, Aug. 10, 2009

Ratings List

New Rating

NorCell 1B AB (publ)

Corporate Credit Rating B/Stable/--

Senior Unsecured

EUR250 mil PIK nts CCC+

Recovery Rating 6

Ratings Affirmed

NorCell Sweden Holding 2 AB(publ)

Corporate Credit Rating B/Stable/--

Senior Unsecured CCC+

Recovery Rating 6

Com Hem AB

Senior Secured B

Recovery Rating 3

NorCell Sweden Holding 3 AB(publ)

Senior Secured B

Recovery Rating 3

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