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Fitch Affirms Cellnex at 'BBB-' on Expansion Deal with Bouygues Telecom
February 3, 2017 / 11:56 AM / 10 months ago

Fitch Affirms Cellnex at 'BBB-' on Expansion Deal with Bouygues Telecom

(The following statement was released by the rating agency) LONDON, February 03 (Fitch) Fitch Ratings has affirmed Spain-based Cellnex Telecom S.A.'s (Cellnex) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. The Outlook on the IDR is Stable The affirmation follows Cellnex's agreement with Bouygues Telecom to acquire and build up to 3,000 sites in France over a five-year period. The agreement envisages a total investment of EUR854 million from Cellnex with a significant proportion of the investment being undertaken in the first two years. Fitch expects Cellnex's funds from operations (FFO) adjusted net leverage on a proforma basis to increase to 5.9x in 2017 from around 5.8x at end-2016, before falling to 5.0x or below by 3Q19. Cellnex's stable and visible cashflow generation allows us to tolerate leverage above the threshold for a 'BBB-' rating for up to three years. KEY RATING DRIVERS Expanding Operations in France: Cellnex's agreement with Bouygues Telecom, if successfully completed, will expand the company's mobile tower portfolio in France to 3,500 from 500. The agreement is structured around two projects. The first one relates to the acquisition of 1,800 sites for a total enterprise value of EUR500 million that will be gradually transferred to Cellnex over two years. The second relates to the building of 1,200 sites over five years with a total investment of EUR354 million. The company intends to fund the acquisition through existing cash resources and future cash flows. Strong Operating Profile Unchanged: The expansion projects in France do not impair the visibility and stability of Cellnex's cash flows, nor dilute the cash generative capability of the company's operations. This reflects the long-term (15 years) nature of the contract with Bouygues that provides a pre-determined pricing mechanism with visibility on associated service costs and capital expenditure requirements. Fitch views the incremental cash flows generated by the projects as carrying broadly similar levels of risk to Cellnex's existing tower portfolio. Extended Timeframe to Reduce Leverage: Fitch typically allows an 18-24 month period to manage post-acquisition leverage spikes. It is, however, extending this period for Cellnex to two to three years based on the low risk attributed to the company's cashflow generation and retained deleveraging capacity, which we expect will be marginally enhanced as a result of the projects. Cellnex benefits from long-term visibility and stability in its revenues, operating cost structure and investment returns, which enhance its credit profile and provides greater scope to manage temporary increases in leverage. To be consistent with a 'BBB-' rating we expect Cellnex to reduce FFO adjusted net leverage to 5.0x or below by 3Q19. This represents a three-year period starting from 3Q16, which was when Cellnex's proforma leverage exceeded 5.0x following its acquisitions of Protelindo NL, Shere Group and expansion of 230 towers from Bouygues Telecom in 2016. Organic Development Supportive of Deleveraging: Cellnex's ability to reduce leverage over the next two to three years is likely to be supported by good organic development prospects derived from a number of sources. These include growth in tenancy ratios, fourth mobile network operator rollout, decommissioning of towers across its footprint, efficiency measures and an ability to reduce operating lease expenses, which effectively reduce off-balance sheet debt. DERIVATION SUMMARY Stability and visibility of cash flow streams drive the basis of Cellnex's ratings. This is derived from inflation-linked long-term contracts of the company's mobile towers portfolio and a scalable, cash-generative business model with low capital intensity requirements and demand-driven capex that reduces investment risks. These factors provide Cellnex significant discretion to manage its credit profile and enable the company to sustain higher leverage per rating band relative to network telecom operators. The levels are, however, lower than American peers' due to the latter's significantly higher domestic market share of mobile tower operations and lower mix of revenues from broadcast tower infrastructure. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer are: - Reported revenue growth of 17% in 2016, driven by acquisitions and the recovery of Spanish TV broadcasting, 9% to 10% per year for 2017 and 2018 (broadly reflecting improvements in tenancy ratios, build-to-suit projects and inflation increases that are partially offset by a decline in the average revenue per tenant); - EBITDA margin around 40% in 2016, increasing to 47% by 2019, reflecting acquisitions, efficiency measures and improvements in tenancy ratios; - Discretionary expansion capex of 8%-9% of revenue (excluding build-to-suit capex in France) which, alongside maintenance capex, increases total non-M&A capex to 11%-12% of revenues annually; - Lease adjusted debt around EUR900 million at end-2016. This is based on a blended lease multiple of 7.7x, reflecting 5x multiple relating to satellite lease expenses and 8x multiple for tower rental and other operating lease expenses; - Dividend pay-out at around 20% of recurring leveraged free cash flow (FCF; as defined by company) for 2016; - Wind Telecomunicazioni SpA exercises its EUR85m Galata put option in 2017 at first available opportunity. RATING SENSITIVITIES Positive: Developments that may, individually or collectively, lead to positive rating action include: - A decrease in FFO-adjusted net leverage to below 4.5x on a sustained basis, which could lead to an upgrade to 'BBB'; - Fixed charge cover of 3.0x or higher (2016E: 2.8x). Negative: Developments that may, individually or collectively, lead to negative rating action include: - Failure to reduce FFO-adjusted net leverage to below 5.0x on a sustained basis by end-3Q19, three years after the acquisitions of CommsCon, Shere Group, Protelindo NL and 230 of Bouygues' tower assets, with no significant and consistent deleveraging progress during this period; - Deterioration in FCF generation detracting from the company's ability to reduce leverage. While leverage is higher than the threshold for the 'BBB-' rating, FCF margin below 10% would be a risk; - Future acquisitions that reduce the company's financial flexibility and deleveraging capacity from current levels of FFO adjusted net leverage of 0.5x-0.6x per year, in the absence of sufficient debt reduction measures; - Fixed charge cover remaining below 2.5x for a sustained period. LIQUIDITY Strong Liquidity: Cellnex generates strong FCF and has no significant debt maturities over the medium term. A EUR500 million revolving credit facility due 2023 (undrawn at end-3Q16) along with credit facilities of EUR325 million due 2019/21 (partially drawn at end-3Q16) provides further liquidity over the next five years. 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 Chairperson Damien Chew, CFA Senior Director +44 20 3530 142 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, 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 analyst. 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