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Fitch Revises TDC's Outlook to Negative; Affirms at 'BBB'
February 9, 2015 / 5:03 PM / 3 years ago

Fitch Revises TDC's Outlook to Negative; Affirms at 'BBB'

(The following statement was released by the rating agency) LONDON, February 09 (Fitch) Fitch Ratings has revised the Outlook on Denmark-based telecoms group TDC A/S's (TDC) Long-term Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at 'BBB'. TDC's rating is underpinned by the group's strong operating profile, which is based primarily on its operations in Denmark. This is reflected in one of the strongest adjusted pre-dividend free cash flow margins in the telecoms sector of 13%. The Negative Outlook reflects a potentially slower pace of deleveraging than originally anticipated following the company's acquisition of Norwegian Cable operator GET in 4Q14, which removed any headroom in the rating. Stronger than anticipated competitive and regulatory pressures impacting the domestic business over the next two to three years are likely to weigh on EBITDA and the rate at which TDC can reduce leverage. Fitch now expects FFO adjusted net leverage to fall below 3.75x (a key leverage threshold for the 'BBB' rating) a year later in 2017. KEY RATING DRIVERS Strong Domestic Position TDC owns both the Danish incumbent copper network and the majority of the cable infrastructure in the country. This gives the company a strong fixed line position compared with all other European incumbents and helps the company to generate best-in-class EBITDA margins. Excluding Norway and Sweden, the company's EBITDA margin was 48.8% in 2014. This is reflected in Fitch-calculated funds from operations (FFO)-adjusted net leverage downgrade guidance of 3.75x, which is at the higher end of the rating category. Increasing Competition and Regulation Competition and regulation are expected to have a significant negative impact on TDC's domestic business over the next three years. The main points of pressure are likely to be driven by a loss of mobile virtual network operator (MVNO) contacts, continued losses in fixed line telephony and competitive pressure in the B2B segment. Regulatory pressure on broadband wholesale prices, retail roaming and cable TV is expected to amount to a gross profit loss of DKK100m-DKK150m by 2015 or approximately 0.5% of 2014 group revenues. TDC is responding by implementing measures to reduce churn and opex, increasing the value of its bundled offers, creating partnerships with utility operators and investing in its core mobile and fixed line networks. Fitch believes that TDC should be able to sustain its free cash flow generation, based on its ability to raise rental prices and an improving market structure in the mobile segment following the merger of Telia Sonera and Telenor's Danish operations. The latter is expected to be supportive over the medium to long term. GET Acquisition In September 2014, TDC announced the acquisition of the Norwegian cable operator GET for EUR1.69bn. The acquisition is to be funded through a combination of debt, hybrid securities and a reduction in dividend payments. The transaction aims to improve TDC's growth profile, increase diversification and gain greater exposure to cable. TDC also aims to generate revenue and cost synergies of EUR22m per annum by 2017. Limited Headroom The debt-funded nature of the GET transaction has removed any headroom TDC had within its 'BBB' rating. The acquisition increased leverage; lifting the group's FFO adjusted net debt to 3.9x from 3.4x in 2014. Fitch expects TDC's leverage will decline to 3.7x by 2017 and further thereafter. The deleveraging is expected to be achieved with a combination of operating cash flow, reduced dividends and the planned issue of hybrid bonds. Given limited headroom within TDC's ratings, the execution of both the company's operational and financial strategy, including the planned hybrid bond issue, is key to meeting its deleveraging trajectory. KEY ASSUMPTIONS Fitch's key assumptions within our ratings case include: - An improvement in the rate of revenue decline within TDC Denmark from 4% YoY in 2014 to 1% by 2016. - A contraction of approximately 1.5 percentage points in EBITDA margin in 2015 reflecting the loss of MVNO contracts, regulatory and competitive pressure in Denmark. - Capex of DKK4.3bn in 2015 excluding spectrum costs and gradually reducing capital intensity from 18% to 17% over three years. - FFO adjusted net leverage declining from 4.0x in 2015 to 3.7x in 2017. - A reduction in dividends in line with the company's new dividend policy of approximately 60% of equity free cash flow. - We do not assume any improvement in operating performance as a result of potential market consolidation. RATING SENSITIVITIES Negative: Future developments that could lead to a downgrade include: - FFO-adjusted net leverage exceeding 3.75x on a sustained basis. - A lack of progress in deleveraging during 2015, as a result of lower operational cash flow or a change in the funding strategy for the GET acquisition. - A marked deterioration in TDC's operating environment and/or unfavourable regulatory decisions. Positive: Future developments that could lead to positive rating action include: - FFO-adjusted net leverage sustainably below 3.0x, together with evidence of improved operational and financial performance could lead to an upgrade to 'BBB+'. - The Outlook could be revised to Stable upon expectations that FFO-adjusted net leverage will fall to below 3.75x on a sustainable basis combined with stabilising EBITDA trends and no further deterioration in competitive and regulatory environments. The rating actions are as follows: Long-term IDR: affirmed at 'BBB'; Outlook revised to Negative from Stable Senior unsecured notes: affirmed at 'BBB' Short-term IDR affirmed at 'F3' Contact: Principal Analyst James Hollamby Analyst +44 20 3530 1656 Supervisory Analyst Tajesh Tailor Director +44 20 3530 1726 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chair Damien Chew, CFA Senior Director +44 20 3530 1424 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on 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. Applicable criteria, 'Corporate Rating Methodology', dated 28 May 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status 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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