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Fitch Affirms Wind Hellas' Rating at 'B-'
December 4, 2017 / 1:48 PM / 7 days ago

Fitch Affirms Wind Hellas' Rating at 'B-'

(The following statement was released by the rating agency) LONDON, December 04 (Fitch) Fitch Ratings has affirmed Crystal Almond Intermediary Holdings Limited's (Wind Hellas) Long-Term Issuer Default Rating (IDR) at 'B-' with a Stable Outlook. In addition, Fitch has affirmed the 'B'/'RR3' issue rating for Crystal Almond S.a.r.l.'s senior secured notes. Wind Hellas has a sustainable business model that has been supported by investments in its mobile network and fixed-line offerings. However, its negative free cash flow and the execution risk related to its capex plan are constraints on the rating. Wind Hellas has also announced a tap issue of EUR75 million senior secured notes which will provide additional liquidity for the firm. Fitch views the additional leverage as consistent with the 'B-' rating. KEY RATING DRIVERS Improved Operations: Wind Hellas has upgraded its infrastructure, improved the customer experience, expanded 4G coverage and reduced costs, and as a result, has seen higher revenues, margins and market share, particularly over the last three quarters. The competitive position of Wind Hellas has stabilised and the market is likely to consolidate into a more rational three-player market. Future growth can be seen in the increase in data usage by mobile customers which has doubled, and the selection of larger data plans by many customers. Mobile remains highly competitive, but a rising proportion of bundles with fixed and in the future TV will probably improve retention. Rapidly Consolidating Market: Cyta Hellas and Forthnet are being auctioned for sale. There have been press reports that both Vodafone and Wind Hellas are potential acquirers of each company. Fixed and mobile in-country consolidation in the Greek market is strategically rational and Fitch views this as credit-positive. Fitch believes that an acquisition of Cyta Hellas by Wind Hellas would make strategic sense and that there would be significant opportunities to achieve cost synergies. Wind Hellas is likely to incur integration costs over the first two years of a potential acquisition with some execution risk. The acquisition of Forthnet, which has over EUR300 million in revenue would be a transformational acquisition and would require the raising of additional debt and lead to higher execution risk. FCF Remains Negative: Wind Hellas remains FCF negative while improving from minus EUR85 million in 2015 to minus EUR48 million in 2016. Fitch expects that Wind Hellas will remain FCF negative in 2017 and 2018 while trending towards neutral to positive FCF after 2019. The issuance of a EUR75 million bond and the addition of a EUR30 million RCF will provide additional liquidity beyond that provided by improving operating cash flow. Capex Drives Network Investment: Wind Hellas has been investing in its mobile network, fibre rollout and its planned launch of TV offerings in 2018. Wind has agreed with Vodafone to expand its joint operating agreement from 2G/3G to 4G which is awaiting regulatory approval. In addition, the Greek government has divided the country into three regions and allocated them in phases to OTE, Vodafone and Wind Hellas. In 2Q17 Wind was awarded 500,000 lines for development and an additional 35,000 lines were awarded in Q3. A commercial next-generation network service was launched in November 2017. Wind has begun testing an IPTV service with a launch expected in 2018. Mobile Growth: Wind has seen four quarters of revenue growth in mobile revenue and three quarters of growth in post-paid revenue. This has been driven by a significant increase in prepaid subscribers from 2.3 million Q316 to 2.9 million in Q317 leading to an increase in total subscribers from 3 million in Q316 to 3.7 million in Q317 and a modest increase in market share. The subscriber growth has been partially offset by declining prepaid ARPU which has decreased from EUR3.2 to EUR2.8, probably due to increased competition. This may be offset by increased data usage. DERIVATION SUMMARY Wind Hellas is the third-largest mobile phone and fixed-line operator in Greece behind OTE (Cosmote) and Vodafone. Both OTE and Vodafone are geographically diversified either within Europe or in emerging markets, but Wind Hellas only operates in Greece. In addition, they include a more diverse product portfolio with OTE being the incumbent fixed-line provider in Greece and Vodafone providing TV services in many markets. Wind's IDR is no longer constrained by the Greek country ceiling of 'B'. KEY ASSUMPTIONS Rating Assumptions Fitch's key assumptions within our rating case for the issuer include: - revenue CAGR of 6.3% between 2017 and 2022 driven by growth capex and increasing 3G/4G population coverage; - EBITDA margin expansion towards 27% in 2022 driven by extension of network sharing; - capex plan in line with the updated business plan including buildout of the next generation network and Pay-TV investments; - spectrum payments in line with management expectations. Recovery Assumptions - The recovery analysis assumes that Wind Hellas would remain a going concern in restructuring and that the company would be reorganised rather than liquidated. We have assumed a 10% administrative claim in the recovery analysis. - The recovery analysis assumes a 25% discount to Wind Hellas' LTM EBITDA as of September 2017, resulting in a post-restructuring EBITDA around EUR75.5 million. At this level of EBITDA, which assumes corrective measures have been taken, we would expect Wind Hellas to generate neutral to negative FCF. - Fitch also assumes a distressed multiple of 4.5x and a fully drawn EUR30 million super senior revolving credit facility (RCF). - These assumptions result in a recovery rate for the senior secured debt within the 'RR3' range to allow a one-notch uplift to the debt rating from the IDR. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Continued maintenance or growth in service revenue market share without a further increase in competitive intensity - A path to sustainable positive free cash flow combined with gross FFO adjusted leverage < 4.5x - Successful execution of the mobile network buildout and investments in its next generation network Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Change in the regulatory or competitive environment which would jeopardise the market position of Wind Hellas. - Fixed charge coverage ratio < 1 or liquidity score < 1 - Persistent negative FCF leading to liquidity below EUR20 million. - An inability to generate EBITDA growth from acquisitions or deterioration in performance due to high integration costs LIQUIDITY Limited Liquidity: We view liquidity as limited given the increased capex, which under our updated rating case will extend the negative FCF generation until 2020. We expect the RCF to remain fully undrawn over the same period. Contact: Primary Analyst Brendan Condon Director +44 203 530 1599 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Athanasios Smprinis Analyst +44 203 530 1643 Committee Chairperson Damien Chew, CFA Senior Director +44 203 530 1424 Summary of Financial Statement Adjustments Operating Leases - Fitch capitalised Wind's operating leases at a 7x multiple according to the Criteria for Rating Non-Financial Corporates. Restricted Cash - Cash held in Greek domiciled banks was treated as restricted. Sources of information The sources of information used to assess this rating were 2016 annual financials, 2017 quarterly financials and a management meeting on 26 September 2017. 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. Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@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 Criteria (pub. 07 Aug 2017) here Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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