(The following statement was released by the rating agency)
Sept 26 - Fitch Ratings has assigned Techem GmbH's EUR410m seven-year 6.125% senior secured notes and EUR450m five-year senior secured loans, a final rating of 'BB'. Fitch has also assigned the EUR325m eight-year 7.875% senior subordinated notes, issued by Techem Energy Metering Service GmbH & Co KG, a rating of 'B'.
The new financing refinances legacy senior and junior loans borrowed in 2008, when Techem was acquired by funds owned by Macquarie European Infrastructure Fund II Limited Partnership, and transaction-related costs.
The assignment of the final ratings follows a review of final documentation which materially conforms to information received at the time the agency assigned the expected ratings together with Techem GmbH's Long-term Issuer Default Rating (IDR) (see "Fitch Assigns Techem 'BB-'; Rates Secured Notes & Loans 'BB(EXP)'; Subordinated Notes 'B(EXP)'" dated 12 September 2012 at www.fitchratings.com).
Techem's 'BB-' IDR is supported by its leading position as a sub-metering business in its domestic German market and its niche industry, which is characterized by stable recurring revenues, with over 80% generated by its domestic and international Energy Services divisions, and underpinned by the duration of contracts of five-10 years in Energy Services and 10-15 years in Energy Contracting. Techem's business is closely associated with that of utilities, particularly distributors of gas and water but does not involve the purchase and resale of energy as counterparty.
German and various other national regulatory frameworks support Techem's business model, which is ultimately driven by demand for consumption-based billing. Besides Techem's relatively low-growth but still highly profitable and stable market position in Germany, Fitch expects its revenue profile to diversify further from growth in its international energy services division, as well as from cross-selling its existing energy contracting offering to its existing customer base.
The rating also incorporates the renewed long-term financing structure with final maturities of five, seven and eight years, including smaller mandatory debt prepayments of the term loans from excess cash flow. However, given the relative dividend flexibility in conjunction with a bullet-type debt maturity profile, the ratings are predicated on Techem's ability to de-leverage, with funds from operations (FFO) to adjusted debt expected to decrease to 5x within two to three years (from approximately 6.2x) at the outset of the new debt structure. High funding costs under the new capital structure are projected to be dilutive of post-operating cash flow. However, Fitch expects deleveraging to be supported by positive free cash flow over the rating horizon.
Techem's ratings are constrained by its expected credit metrics under the new capital structure,
including initial FFO adjusted leverage of c. 6.2x and FFO interest coverage of above 2x, which is perceived to be low for the assigned rating level, notwithstanding the lower-than-average business risks. Through a combination of debt reduction and FFO growth, Fitch estimates credit protection measures will strengthen within two to three years, with FFO adjusted leverage declining towards 5x and FFO interest coverage approaching 2.5x. Failure to use excess cash flow to accelerate debt reduction while also maintaining a solid liquidity profile could result in negative rating action.
The assigned instrument ratings follow broad considerations of relative recoveries to notch issue ratings from 'BB' category IDRs, as described in Fitch's "Recovery Ratings and Notching Criteria
for Non-Financial Corporate Issuers" dated 14 August 2012 and available at www.fitchratings.com.
The new senior secured loans rank pari passu with the secured notes and benefit from a first-ranking security ownership interest in each obligor (other than the parent) and guarantees provided by major subsidiaries accounting for c. 85% of consolidated EBITDA and gross assets. The new subordinated notes are structurally and contractually subordinated which results in a one-notch uplift of the senior secured instruments relative to the IDR and a two-notch discount for the subordinated notes.
Positive: Future developments that may, individually or collectively, lead to positive rating action include
- Further improvement in operating profitability through organic business growth, accelerated debt prepayment that reduces FFO adjusted leverage beyond Fitch's current expectations to below 4.5x on a sustainable basis
- FFO interest coverage ratio of 3x or above on a sustained basis.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- FFO adjusted leverage at or above 6x over a sustained period due to a significant decline in profitability versus Fitch's expectations
- Inability to reduce debt in the year following the refinancing
- FFO interest coverage below 2x
- Negative organic revenue dynamics for several successive years
- Negative free cash flow resulting in reduced available liquidity falling below EUR40m.
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