(The following statement was released by the rating agency)
Dec 18 -
-- Dutch telecommunications group Koninklijke KPN announced a EUR1.35 billion acquisition of spectrum licenses and also a dividend cut for 2013-2014.
-- We believe the dividend cut might not be sufficient to sustain the rating, given the immediate negative impact of the spectrum acquisition that was bigger than we had expected, already tight credit metrics for the rating, and the still difficult and very uncertain domestic market.
-- We are placing our ‘BBB/A-2’ ratings on CreditWatch with negative implications.
-- We will likely resolve the CreditWatch placement within three months, after we talk with management and our reassessment of the group’s business risk profile.
On Dec. 18, 2012, Standard & Poor’s Ratings Services placed its ‘BBB’ long-term and ‘A-2’ short-term rating corporate credit ratings on Dutch telecom incumbent Koninklijke KPN N.V. (KPN) on CreditWatch with negative implications.
The CreditWatch placement reflects our view that KPN’s credit metrics, which are already tight for the current rating level, will likely become subpar for the rating at year-end 2012 after the company’s EUR1.35 billion announced spectrum acquisition. To mitigate the impact of this investment, the company has announced a dividend cut that should generate significant cash savings in 2013 and in 2014.
That said, the beneficial impact of this measure might take too long to materialize to sustain the rating, given the challenging and still highly uncertain domestic market. In addition, we think flexibility levers available to the group to accelerate deleverage and tackle uncertain market developments will be increasingly scarce after this new dividend cut.
At this stage, factoring in the spectrum acquisition liability, we think that Standard & Poor‘s-adjusted debt-to-EBITDA ratio for KPN at the end of 2012 will likely increase to higher than 3.5x, the maximum level we consider as adequate for the current rating given our current business risk profile assessment. The announced dividend cut will generate cash savings in 2013 and 2014 and likely help to cushion the immediate negative impact of the spectrum acquisition. That being said, as we foresee further EBITDA downside into 2013 in our base case, and are mindful of a quite high level of uncertainty regarding market developments, the announced dividend cuts could fall short of what would be necessary to sufficiently and timely restore credit metrics within adequate parameters.
The rating continues to reflect our assessment of KPN’s “significant” financial risk profile balanced by a “strong” business risk profile, including our “satisfactory” management and strategy assessment. At this stage we assume that the company’s turnaround strategy for the domestic mobile and broadband segments will prove successful.
That said, the group is facing intense pressures on its domestic mobile revenues in particular, owing to the cannibalization of consumer revenues by IP-based instant messaging applications. While KPN has implemented a number of countermeasures to buffer EBITDA, their timing and degree of success remain uncertain in our view. Insufficient evidence that the group can stabilize EBITDA thanks to those initiatives could also lead us to reassess its business risk profile downward.
The short-term rating is ‘A-2’, reflecting our assessment of KPN’s liquidity as “adequate” under our criteria.
We think KPN has well-established and solid relationships with banks, and that it will continue to have good access to capital markets owing to its domicile in The Netherlands, in the absence of any exposure to more risky emerging economies.
Tempering these positive aspects is our anticipation of significantly lower free cash flows in 2012, compared with previous years, and continuously heavy postretirement obligations, whose fluctuations, net of dedicated assets, may require additional cash contributions at times.
Given the large impact of the spectrum acquisition, we think the group will swiftly seek to take refinancing measures to regain some more liquidity headroom.
The ratio of sources to uses was about 1.2x at end-September 2012, pro forma for the EUR1.5 billion spectrum acquisition liability.
Liquidity sources comprise:
-- A EUR2 billion committed line maturing in July 2017, without any financial maintenance covenants, which was fully undrawn at end-September 2012;
-- EUR1.5 billion in reported cash at end-September 2012; and
-- Our anticipation of about EUR3.5 billion in annual funds from operations (FFO).
Liquidity uses include:
-- About EUR2.0 billion-EUR2.2 billion in annual capital expenditures;
-- The spectrum acquisition;
-- No dividends, factoring in the announced cut; and
-- EUR2.1 billion of short-term debt (of which EUR1 billion repaid on Nov. 13, 2012).
We will likely resolve the CreditWatch placement within three months, after we have talked with management. We also intend to reassess the group’s business risk profile in light of the latest market developments at that point.
We could lower the rating if the company fails to timely restore sufficiently stronger ratios or if we were to lower our business risk assessment. In case of a downgrade, we believe it would be a maximum of one notch.
Related Criteria And Research
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Key Credit Factors: Business And Financial Risks In The Global Telecommunication, Cable, And Satellite Broadcast Industry, Jan. 27, 2009
Ratings Affirmed; CreditWatch/Outlook Action
Koninklijke KPN N.V.
Corporate Credit Rating BBB/Watch Neg/A-2 BBB/Negative/A-2
Senior Unsecured BBB/Watch Neg BBB