S&P base-case operating scenario
We anticipate that Belgacom’s overall business performance will remain sound in the fourth quarter of 2012 and in 2013, supported by successful execution of its fixed-mobile convergence strategy. Belgacom retains good growth opportunities in bundled products and mobile broadband in the consumer segment in our view. This, combined with its ongoing network upgrade investments, should enable the group to maintain its clear market leadership positions.
Early investments to massively roll out fiber-to-the-curb in Belgium enable Belgacom to deliver speed of up to 30 megabits per second and a robust TV platform to more than 83% of Belgian households, which should continue to prove a key competitive asset against cable operators. In addition, in November 2012, Belgacom was the first mobile operator in Belgium to commercially launch ultra-fast mobile Internet (4G technology). Nevertheless, growth in mobile broadband revenues should remain subdued in the near term, compared with other large Western European wireless operators, given the still limited smartphone penetration in Belgium, reflecting the absence of wide-spread handset subsidies in the market.
That said, we expect the group to post broadly flat revenues and a low- to mid-single-digit EBITDA decline in 2012 and 2013, notably because of the impact of regulatory measures. Increasing spending for customer gains or retention, owing to heightened competition on bundled products from cable operators in an increasingly penetrated market, could also impair the group’s performance in our view.
Under our base-case scenario, we believe the group’s ongoing cost efficiency program will not sufficiently offset the impact of adverse regulatory changes and negative sales mix trends, resulting in a gradual erosion of EBITDA margin to 28% in 2013, a weaker level than European peers’. In addition, we think the potential introduction of mobile handset subsidies to increase mobile data revenues could weigh negatively on the margins of Belgacom’s mobile phone division.
Belgacom faces ongoing adverse regulatory decisions. The regulator has decided to progressively implement substantial mobile termination rate (MTR) and roaming rate cuts until 2013-2014. We believe, however, that the impact on EBITDA will be more limited than on revenues because Belgacom’s interconnection costs slightly exceed its interconnection revenues, and MTRs will become symmetrical from Jan. 1, 2013.
S&P base-case cash flow and capital-structure scenario
Despite the various factors constraining its EBITDA, we see Belgacom continuing to display strong credit metrics, underpinned by sound profitability and good FOCF generation. That said, FOCF generation meaningfully declined year on year in the first nine months of 2012 to EUR561 million, from EUR762 million over the same period the previous year. This mainly reflects the group’s EBITDA decline, larger network investments, and negative working capital change over the period.
Despite a likely slight decline in FOCF for full-year 2012 compared with the EUR794 million generated in 2011, management recently announced a nonrecurring increased dividend payout for 2012, while also affirming the group’s dividend policy of not returning more cash than FOCF generation to shareholders. The additional dividend, to be paid in December 2012, will replace the outstanding share buyback program. We still believe discretionary cash flow (FOCF minus dividends) should be slightly negative in 2012 and about breakeven in 2013, which we consider a key support for the ratings.
We expect the group to maintain sound financial flexibility in 2012, and project Standard & Poor’s adjusted debt to EBITDA at about 1.5x at year-end 2012 and year-end 2013, compared with 1.3x on Sept. 30, 2012.
The short-term rating on Belgacom is ‘A-1’. We assess the group’s liquidity as “strong,” under our criteria. On Sept. 30, 2012, liquidity was supported by a cash balance of EUR365 million, our base-case forecast of robust FOCF generation slightly in excess of EUR700 million over the next 12 months, and access to several undrawn long- and short-term committed credit facilities. We estimate that these facilities totaled about EUR850 million at the end of September 2012.
We believe that these cash resources provide Belgacom with good financial flexibility to face a small short-term debt burden of EUR61 million and fund the abovementioned shareholder returns.
We project that the group’s sources of liquidity, including cash and credit-line availability, will exceed its uses by 1.5x or more over the next 12 months. Based on our base-case scenario expectations for FOCF generation, we believe that Belgacom will not face liquidity concerns over the next 18 months.
The stable outlook reflects our view that Belgacom will maintain strong business positions in both the fixed-line and mobile telecoms segments in Belgium. Under our base-case scenario, we also believe that the group will likely generate robust FOCF of about EUR700 million or slightly more in 2013, despite the underlying regulatory risks and competition associated with its operations. In addition, at this stage we anticipate that Belgacom will not distribute dividends that meaningfully exceed FOCF, by our estimates, generated in 2013.
We will continue to monitor Belgacom’s financial discipline, ability to preserve sound EBITDA margins, and cash conversion, which are, in our view, core to our ratings on the group. We expect Belgacom to maintain adjusted debt to EBITDA below 2x, which we see as commensurate with the ratings.
A move by Belgacom to a more aggressive financial policy, a sustained weakening in the group’s business risk profile, or a deterioration in the group’s financial profile, as a result of a strongly unfavorable judgment relating to ongoing litigation, could prompt us to lower the ratings.
We are unlikely to raise the ratings on Belgacom in the future, given the strain we see on its business risk profile from competition and regulatory pressures.
Related Criteria And Research
-- Europe’s Telecom Incumbents Preserve Strong Business Risk Profiles, For The Moment, Oct. 2, 2012
-- The Largest Operators Have The Most To Lose In Europe’s Telecom Market, Nov. 7, 2012
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008