November 2, 2017 / 5:24 PM / a year ago

Fitch Affirms Orange at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, November 02 (Fitch) Fitch Ratings has affirmed Orange S.A.'s Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+'. The Outlook is Stable. A full list of rating actions is below. Orange's rating is underpinned by the telecom group's strong domestic position in France, which represented 59% of the group's adjusted EBITDA minus capex at end-2016. A convergence-based strategy across its main European operations is successfully improving revenue trends, which combined with cost reductions, is leading to improvements in underlying EBITDA. Orange's leverage is comfortably within the 'BBB+' rating, providing financial flexibility to manage operational risks and investments. However, ongoing capex for broadband networks will continue to restrain cashflow generation and organic deleveraging capacity over the next two to three years. KEY RATING DRIVERS Improving Operating Environment in France: Orange achieved revenue growth of 0.2% in 9M17 as growth in broadband and wholesale services offset declines in mobile and legacy voice products. Network-based investments are enabling some differentiation on quality that Orange is successfully leveraging in higher value market segments and through selective price increases. We expect Iliad's desire to increase scale in mobile and Bouygues's aim to increase market share in fixed line will continue to drive competitive dynamics particularly in the lower value segments of the market. They are however, unlikely to create further pricing pressure from current levels. Content Price Inflation Unlikely: Content investments by SFR in France are, in our opinion, unlikely to drive a retaliatory response from Orange in the short- to medium-term. Orange has a strong domestic broadband market share that enables it to compete through a content aggregation and distribution strategy, which harnesses OTT platforms and enables partnership with other content providers. Although content costs may incrementally increase, Orange's strategy should be sufficient to protect the company's market share with potentially, some reallocation of costs. Rural Fibre Risks Manageable: The deployments of alternative wholesale fibre networks in rural parts of France are a risk that could impact Orange in the medium-term. The less dense areas account for around 40% of the country where the company has around 60% market share. Orange has also acquired some of the sold rural franchises with the ability to co-invest. The degree of the impact on Orange will depend on the extent to which average revenue per user (ARPU) uplift and fibre uptake can offset declines in wholesale revenue. While there are scenarios where the impact could be minimal, we believe continued cost control and investments in a value-for-money converged product should minimise any impact. Continued Growth in International Operations: Orange's international operations continue to support the company's growth and contributed around 29% of adjusted EBITDA minus capex in 2016. The main drivers of growth are the company's operations in Spain and Africa and Middle East. We expect the contribution to increase by 15% to 20% over the next five years and increase the diversification of cashflow streams. Leverage Headroom, FCF Constrained: We expect Orange's funds from operations (FFO)-adjusted net leverage to remain broadly stable at 3.1x over the next three to four years. This is comfortably below Orange's downgrade sensitivity of 3.5x and provides the company flexibility to manage operational risks and pursue investment opportunities. While the headroom is better than peers' such as Telefonica SA (BBB/Stable) and Deutsche Telekom AG (BBB+/Stable), organic deleveraging capacity and free cashflow generation is slightly more constrained as a result of network capex, which we do not envisage a significant decline in the next three years. Deconsolidated Bank Profile: Orange acquired a 65% stake in Groupama Banque in 2016. Orange fully consolidates the banking operations in its financial reporting but provides good segment disclosure. The acquisition was a strategic move, aimed at leveraging Orange's existing expertise in digital and online distribution to create a sizeable online bank in France that could be expanded into other international operations. Fitch's analysis of Orange focuses primarily on the telecoms segment and deconsolidates the banking operations. This is in line with Fitch's criteria for finance services subsidiaries, which allow for the deconsolidation of financial operations that have a low investment-grade rating or better. To this extent Fitch has conservatively assumed a EUR500 million increase to Orange's gross adjusted debt, which represents a hypothetical equity injection into the bank. Based on this level of funding, we believe that the cash flows of the bank will be sufficient to fund the operations on a standalone basis. The adjustment has a negligible impact on Orange's leverage metrics. DERIVATION SUMMARY Orange is rated in line with other geographically diversified European telecoms operators such as Deutsche Telekom AG (BBB+/Stable) and Vodafone Group (BBB+/Stable). The rating is slightly higher than Telefonica SA's (BBB/Stable) due to the latter's greater cash flow exposure to emerging markets with sub-investment grade ratings. Orange and the peer group combine strong operational positions in both fixed and/or mobile with sizeable and diverse cashflow generation. Operators with a single market focus such as Royal KPN NV (BBB/Stable) and BT Group Plc (BBB+/Stable) have tighter leverage thresholds for their respective ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case relating to the telecoms segment of the issuer include: - Stable to slowly growing revenue in 2017-2019; - Adjusted EBITDA margin of 31% in 2017-2019; - Capex-to-sales ratio (excluding spectrum) of 17% per year; and - Dividends of EUR1.7 billion per year. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Expectations of FFO-adjusted net leverage trending below 2.5x on a sustained basis. -Improved competitive position in Orange's domestic and other key international markets combined with growth in pre-dividend free cash flow (FCF). Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -FFO-adjusted net leverage trending above 3.5x on a sustained basis. -Pressure on FCF, driven by continued EBITDA erosion, higher capex and shareholder distribution, or significant underperformance in the core domestic market and at other key subsidiaries. LIQUIDITY Strong Liquidity: Orange had EUR7.9 billion of cash and cash equivalents at end-2016 and has access to EUR6.3 billion of undrawn revolving lines. Fitch does not expect any liquidity issues. FULL LIST OF RATING ACTIONS Orange S.A. -- Long-Term IDR: affirmed at 'BBB+'; Outlook Stable; -- Senior unsecured rating: affirmed at 'BBB+'/'F2'; -- Short-Term IDR: affirmed at 'F2'; -- Commercial paper programme: affirmed at 'F2'; -- Subordinated undated notes: affirmed at 'BBB-'. Contact: Principal Analyst Alexander Cherepovitsyn, CFA Analyst +44 20 3530 1755 Supervisory Analyst Tajesh Tailor Senior Director +44 20 3530 1726 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Stuart Reid Senior Director +44 20 3530 1085 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email:; Adrian Simpson, London, Tel: +44 203 530 1010, Email: Additional information is available on 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 Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Hybrids Treatment and Notching Criteria (pub. 27 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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