S&P base-case operating scenario
In our base-case assessment, we assume that Bite will maintain its market position, sustain the turnaround of its previously loss-making Latvian operations, and continue to improve profitability.
We believe revenues will increase only moderately over the next two years, at low single-digit rates, despite the improving macroeconomic environment in Lithuania and Latvia. This is because interconnect rates were cut in January 2012 by 44% in Lithuania and 13% in Latvia, and the competitive climate will remain difficult in our view. We expect profitability to continue to improve gradually in Latvia, contributing to an adjusted consolidated EBITDA margin of about 26% in 2012 and 2013, from 24.6% in 2011 and 25.0% for the 12 months ended March 31, 2012.
In the quarter ended March 31, 2012, the company’s revenues increased by 3% compared with the corresponding period of 2011. Bite managed to gain subscribers, especially in Latvia where the number of postpaid customers rose by 64% year on year, offsetting lower interconnect rates in Lithuania and Latvia and competitive pressure on prices. Reported EBITDA in the first quarter of 2012 increased by 9%, thanks to strong profitability improvement in Latvia and the elimination of handset subsidies in Latvia and Lithuania in late 2011.
S&P base-case cash flow and capital-structure scenario
In our base-case assessment, we assume that FOCF will increase and that Bite could use some of the excess cash flow to reduce debt. We expect FOCF to increase gradually to EUR20 million in 2012 and nearly EUR25 million in 2013, from EUR17 million in 2011. We project that the ratio of gross debt to EBITDA will decrease to 4.2x in 2012 and 4x in 2013, from 4.4x in 2011. We expect the ratio of funds from operations (FFO) to debt to increase to about 20% in 2012 from 17.9% in 2011. However, we anticipate that the ratio of debt to capital will remain high, at 60%-65% over the next two years.
We have included in our forecasts limited outflows relating to licenses for long-term evolution (LTE) technology that Bite attained in Lithuania and Latvia in the first quarter of 2012.
In our opinion, Bite’s liquidity position is “adequate,” as defined in our criteria. We base this on our estimate of the company’s sources of liquidity exceeding uses by at least 1.2x over the next two years.
The key liquidity sources are:
— Access to a EUR30 million revolving credit facility (RCF) maturing in June 2013, of which EUR19.5 million were undrawn on March 31, 2012; and
— FFO of EUR35 million in 2012, which we anticipate will increase in 2013.
Against these sources, we anticipate the following liquidity uses:
— Capital expenditure of about EUR14 million-EUR15 million in 2012 (including LTE licenses) and EUR13 million in 2013;
— Reduction in the size of the RCF to EUR20 million in December 2012, to EUR15 million in March 2013, and zero in June 2013; and
— Repayment of the EUR5 million short-term credit facility, maturing in November 2012, which was fully drawn on March 31, 2012.
We expect covenant headroom to remain at about 30% over the next two years.
The rating on the EUR172 million senior secured floating-rate notes due 2014 issued by Bite Finance International, Bite’s parent company, is ‘B-‘. The notes rank junior only to the group’s EUR30 million senior secured RCF, which benefits from senior first-ranking security over substantially all the group’s assets through a pledge of secured intercompany notes.
Lenders of the senior secured notes benefit primarily from second-ranking share pledges over the capital stock of the Bite group and the capital stock of SIA EECF Bella FinCo (FinCo; not rated), a 100%-owned subsidiary of Bite Finance International. Furthermore, the Bite group and FinCo guarantee these notes.
The rating on the outstanding subordinated floating-rate notes, a senior unsecured obligation issued by Bite Finance International, is ‘CCC+’. This instrument ranks behind the senior secured notes and the RCF.
The covenant package for the senior secured notes comprises a negative pledge; limitations on disposals, dividend payouts, transactions with affiliates, mergers, and the consolidation or sale of assets; restrictions on issuing preference shares; and a financial covenant governing additional debt, including a debt-incurrence ratio of 6x consolidated leverage. The documentation for the senior secured notes also include a change-of-control clause stipulating payment of 101% of the principal outstanding if triggered. The RCF comprises the same covenant package, but also includes a number of maintenance financial covenants.
The stable outlook reflects our opinion that Bite will maintain comfortable covenant headroom, report an increasing EBITDA margin, and maintain debt to less than 5x EBITDA, with the potential to deleverage further thanks to likely FOCF growth over the next two years.
We could lower the ratings if the EBITDA margin decreased toward 20%, pressuring liquidity and covenant headroom, or if revenues declined significantly either because of lower market share or negative economic developments. A downgrade could also materialize if the group were unable to refinance the EUR172 million senior secured notes due 2014 before midyear 2013.
Ratings upside is unlikely over the next 12 months as it would require a meaningful improvement in profitability and a reduction in the debt-to-EBITDA ratio to less than 4x.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
— Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
— Key Credit Factors: Business and Financial Risks in the Global Telecommunications, Cable and Satellite Broadcast Industry, Jan. 27, 2009
— Principles Of Corporate And Government Ratings, June 26, 2007