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Fitch Affirms Telenet at 'BB-'; Outlook Stable
June 12, 2017 / 4:33 PM / 6 months ago

Fitch Affirms Telenet at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, June 12 (Fitch) Fitch Ratings has affirmed Belgium-based Telenet BVBA's (Telenet: formerly Telenet N.V.) Long-Term Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook and Short-Term IDR at 'B'. At the same time Fitch is transferring the IDRs to Telenet Group Holdings N.V, which is now the parent company of Telenet with the same Long- and Short-Term IDRs of 'BB-'/'B'. The Outlook is Stable. The transfer follows a reorganisation of the company structure following its acquisition of mobile operator BASE. Following the acquisition, Telenet Group Holdings N.V. has become the ultimate parent of the group. The agency has also affirmed the group's senior secured rating at 'BB' with a Recovery Rating of 'RR2'. A full list of ratings is provided below. The ratings of Telenet reflect its strong operating profile, ability to sustain its competitive position and generate robust and stable free cash flows (FCF). While competition brought about from cable wholesale regulation is likely to affect Telenet's growth profile the impact is likely to be limited and manageable. The company retains significant discretion in managing its capital structure within its 3.5x-4.5x net debt-to-EBITDA target as a result of strong cash generation and a flexible shareholder remuneration approach. The flexibility of this approach is key to Telenet's credit profile and ratings. KEY RATING DRIVERS Strong Operating Position: Telenet operates a cable network within Flanders and some parts of Brussels. Consolidation of local loop unbundling providers has resulted in duopolistic competition in infrastructure-based fixed line within the consumer segment. Fibre-to-the-home deployment from incumbent Proximus has so far been slower than in other western European markets such as France, Spain and the Netherlands. Within its franchise area, Telenet services around 65%-70% of households, to which it provides TV, broadband or fixed-line telephony. This provides sufficient scale to generate a stable underlying pre-dividend FCF of around EUR400 million per year. Sustaining Competitiveness a Virtuous Circle: Telenet has been able to sustain its leading market position by investing in its network infrastructure, providing rich, value-for-money content bundles and improving customer service. This supports the company's FCF generation, which in turn enables investments in network infrastructure and content that improve the value of Telenet's product proposition and aid product differentiation. Mobile Network Strengthens Operating Profile: The acquisition of mobile operator BASE in 2016 enabled Telenet to gain mobile network ownership, expand distribution across the country and more than double its mobile subscriber base. Mobile network ownership enables Telenet to fully exploit the economic benefits of sector convergence while removing limitations on volume-based data pricing and B2B/SME segment servicing that the alternative MVNO model would impose. Wholesale Regulation May Change: New Belgian regulation in 1Q16 allows third parties access to Telenet's cable infrastructure on a wholesale basis, based on a retail minus pricing formula that applies to TV and broadband combined. The Belgian regulator is considering changing the formula to a 'cost plus' approach, which creates some uncertainty. The move, if it happens, is unlikely to occur in the short-term but would reduce the wholesale fees that Telenet receives while improving the economics for the retailing party Orange Belgium. Competition from Wholesale Regulation Manageable: We believe the impact on Telenet from wholesale regulation is likely to be limited and manageable. Our base case scenario continues to envisage a EUR60 million- EUR70 million impact on EBITDA if Orange Belgium takes a 10% market share in Flanders and Brussels. This is based on the existing retail minus formula and assumes the new entrant takes 80% from Telenet and 20% from Proximus while losing an average value customer. Telenet has sufficient margin in its pre-dividend FCF to absorb the impact and maintain funds from operations (FFO) adjusted net leverage (leverage) below 5.2x if it chooses. A move to a cost plus pricing formula could increase the impact on EBITDA assumed in our base case, the extent of which would depend on how Orange Belgium passes on margin savings to customers. However, our assumptions on the impact to Telenet is arguably cautious; the greatest loss of market share is likely to occur in price-sensitive segments, Orange Belgium already has a low margin on the product and a 10% market share shift is unlikely in the short-, or even medium, term. Factors that constrain market share loss include market maturity and churn levels, the prevalence of triple-play take-up and the cost of economically providing attractive content. Commensurate Shareholder Remuneration: Telenet retains significant discretion in managing its capital structure due to its strong FCF generation. The company ties shareholder remuneration to growth, market opportunities and operating risks. The approach is credit-positive as it provides flexibility for M&A, investments and the preservation of credit metrics. Leverage Profile: Historically Telenet has broadly managed leverage towards the middle of their target net debt-to- EBITDA 3.5x-4.5x. The midpoint corresponds to the upper end of the FFO adjusted net leverage threshold for its current ratings, which is 5.2x. Fitch's base case forecasts assume that leverage will be maintained at this upper level through shareholder dividends of EUR400 million-EUR500 million per year. Notching of Secured Debt: In line with Fitch's notching criteria, the company's secured debt is rated 'BB', one notch higher than the IDR. The Recovery Rating on Telenet's senior secured debt is capped at 'RR2' due to the Belgian Country Ceiling. DERIVATION SUMMARY Telenet's ratings are driven by the company's strong operating profile, which is supported by a comparatively favourable market structure in broadband and a sustainable competitive position. This enables Telenet to generate robust and stable FCF and support a leveraged balance sheet. The company's leverage target relative to other western European telecoms operators is high and represents a constraint on the ratings. Telenet targets leverage 3.5x - 4.5x net debt- to-EBITDA (based on its definition). This is broadly in line with similarly rated cable peers Virgin Media Inc. (BB-/Stable) and VodafoneZiggo Group BV (BB-/Negative) once net debt is adjusted for finance leases. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Stable yoy revenue growth in 2017; - Mid-single-digit yoy EBITDA growth in 2017; - A capex/sales ratio of around 24%; - Dividend payments of EUR300 million in 2017 and growing to EUR500 million from 2018; - In line with Fitch's policy to only include M&A activity once it is completed, the acquisition of SFR Belux has not been included in Fitch base case scenario of the group. The acquisition will, however, have limited impact on Telenet's credit metrics. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - A weakening in the operating environment due to increased competition from cable wholesale leading to a larger than-expected market share loss and decrease in EBITDA. -FFO-adjusted net leverage consistently over 5.2x (corresponding to approximately 3.8x-to-4.1x net debt-to- EBITDA based on the company's definition and growth in cash tax payments) and FFO fixed charge cover trending below 2.5x (2016: 3.4x). -A change in financial or dividend policy leading to new, higher leverage targets. Positive rating action is unlikely in the medium-term unless management pursues a more conservative financial policy. LIQUIDITY Strong Liquidity: Telenet has a strong liquidity position as a result of positive internal cash flow generation and undrawn credit facilities of EUR545 million as of end-2016. Telenet has a long-dated debt maturity profile, with the first debt maturity occurring in 2022. FULL LIST OF RATING ACTIONS Telenet N.V. (renamed Telenet BVBA) -- Long-Term IDR affirmed 'BB-' with Stable Outlook and Short-Term IDR affirmed at 'B' (transferred to Telenet Group Holding N.V.) -- Senior secured debt rating affirmed at 'BB' and withdrawn. Telenet Group Holdings N.V. -- Long-Term IDR transferred from Telenet BVBA at 'BB-'; Stable Outlook -- Short-Term IDR transferred from Telenet BVBA at 'B' Telenet International Finance S.a.r.L. -- Senior secured term loan affirmed at 'BB' / 'RR2' -- Senior secured bank facility assigned 'BB' 'RR2' Telenet Financing USD LLC. -- Senior secured term loan affirmed at 'BB' / 'RR2' Telenet Finance V Luxembourg S.C.A -- Senior secured notes affirmed at 'BB' / 'RR2' Telenet Finance VI Luxembourg S.C.A -- Senior secured notes affirmed at 'BB' / 'RR2' 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 Damien Chew, CFA Senior Director +44 20 3530 1424 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Summary of Financial Statement Adjustments Fitch has made the following adjustments to Telenet's reported financial statements which result in different net debt- to-EBITDA leverage metrics compared with the company reported metrics: -- In line with Fitch's approach to include content costs as part of FFO, EUR60 million of content amortisation costs have been included in adjusted EBITDA as proxy to improve the comparability of credit metrics with other rated TMT peers. -- Fitch has included the company's finance lease obligations, which amounted to EUR359 million, in debt calculations. 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