SNW) SeeNews - S&P revises Bulgaria's Vivacom outlook to negati ve on
SeeNews - S&P revises Bulgaria's Vivacom outlook to negative on lower deleveraging prospects, 'BB-' rating affirmed
SOFIA (Bulgaria), July 14 (SeeNews) – Standard & Poor's Ratings Services said it revised its outlook on Bulgaria-based integrated telecoms operator Bulgarian Telecommunications Co. AD to negative from positive.
"Following Bulgaria National Bank's decision to revoke the license of Corporate Commercial Bank (CCB), currently a sister company of Bulgaria-based integrated telecoms operator Bulgarian Telecommunications Co. AD (Vivacom), we view it as unlikely that the group's 150 million euro bridge loan will be replaced with equity as we originally expected," the ratings agency said in a statement on Friday.
At the same the rating's agency affirmed its long-term corporate credit rating on the company at 'BB-'.
S&P also said in the statement:
"The outlook revision reflects our assessment that the planned refinancing of the €150 million bridge loan at Vivacom's holding company with equity is now unlikely to happen, and that the group may instead try to refinance it with new debt before it matures in May 2015. In addition, the majority of the company's cash balances (more than 75%) are currently located at CCB, which, it has been announced, is likely to have its license revoked. Finally, macroeconomic prospects in Bulgaria remain weak and competition remains fierce, which continues to impede the group's revenue prospects. As a result, we now believe that the group's credit metrics are unlikely to improve as we had previously expected, and could instead deteriorate over the next 12 months.
CCB is majority owned by Vivacom's 43%-owner, Mr. Tzvetan Vassilev. Initially, Mr. Vassilev was scheduled to make a meaningful contribution to the originally planned capital increase at Vivacom, to maintain his current stake in Vivacom.
However, we assess that it is becoming more likely that the group will attempt to refinance this loan with debt instead, and we are uncertain as to whether a refinancing of this loan will be successful. There are also uncertainties surrounding the timing of such a refinancing, given the current macroeconomic environment in Bulgaria. If a refinancing at the parent level is unsuccessful in the short term, we see a risk that Vivacom may ultimately assume this debt, at a potentially high cost of funding, which could lead to weaker cash flow generation and interest coverage ratios than we currently assume. Furthermore, we understand that a default on the bridge loan could trigger the change-of-control clause under Vivacom's debt.
The negative outlook also reflects our view that Vivacom will be exposed to material country risks in Bulgaria, such as lackluster GDP growth and high unemployment, if reforms are not successfully executed; and potential operational risks related to high levels of corruption in the market (for further details see "Bulgaria Ratings Lowered To 'BBB-/A-3' On Weak Reform Environment; Outlook Stable," published on June 13, 2014, on RatingsDirect). We assess that these risks may limit the company's operating and financial results over the medium term, notably in respect to continued fierce pricing pressures across all segments, due to constrained consumer spending.
We continue to assess Vivacom's business risk profile as "fair." Our assessment reflects the company's solid market position in Bulgaria, as one of the two-largest telecoms operators, and its availability of convergent offers, including landline voice, broadband, pay-TV, and mobile, with the widest fixed-line coverage on the market.
Our assessment also reflects Vivacom's solid operating efficiency, which has translated into EBITDA margin percentages in the high 30s, contributed to by an efficient cost structure, and partly thanks to relatively limited subscriber acquisition costs in the Bulgarian mobile market. We view the main constraint to the company's competitive position in the highly competitive and price-sensitive telecoms market in Bulgaria, as competition from the subsidiaries of significantly larger telecoms operators. We currently see the main competitive threat coming from Globul, which has already somewhat increased its mobile network upgrade since its acquisition by Telenor.
Our assessment of Vivacom's "aggressive" financial risk profile reflects forecast leverage of between 3.5x and 4.0x and funds from operations (FFO) to debt of less than 20%, as well as free operating cash flow (FOCF) to debt of 5%-10%. Our credit ratios include the debt at Vivacom's parent company. We currently make no surplus cash adjustment for Vivacom, as the majority of its cash balances (more than 75%) are currently located at CCB. In our view, the company's current cash interest coverage of about 6x is the key strength of its financial risk profile.
Our base case for 2014-2015 assumes:
GDP growth in Bulgaria of 1.5% in 2014 and 1.8% in 2015, continued high unemployment (exceeding 13%), and continued emigration.
Slower mobile subscriber growth, notably from 2015 onward, as Globul improves its network quality, along with stabilization of broadband services and a continued subscriber loss in fixed- voice. The latter will be due to fixed-to-mobile substitution, resulting in about 2%-3% revenue decline in 2014 and about 1% in 2015.
Adjusted EBITDA margins slightly improving to about 41% due to increased efficiencies and the declining negative impact of regulation.
Small annual voluntary debt reductions (amounting to about 5% of the notes).
Capital expenditure (capex) to sales of about 19% in 2014, increasing to about 26% in 2015, due to one off long-term evolution (LTE) license payments.
Based on these assumptions, we arrive at the following credit measures:
Debt to EBITDA of 3.8x in 2014 and 2015.
Recurring FOCF to debt of 7%-8%.
Funds from operations to debt of 19%.
FFO cash interest coverage of about 6x in 2014.
We assess Vivacom's liquidity as "adequate" under our criteria. We forecast that the ratio of liquidity sources to uses will be higher than 1.2x over the next 12 months. Even if some of Vivacom's cash balances are not available over the short term, we still anticipate that its internal sources will adequately cover its uses. Under our base-case scenario for 2014, we project the following sources of liquidity:
Cash balances of about Bulgarian lev (BGN) 118 million as of March 31, 2014; FFO of about BGN250 million-BGN 260 million.
Under our base-case scenario for 2014, we project the following uses of liquidity:
Working capital requirements of BGN10 million-BGN20 million; and Capex of about BGN150 million.
The negative outlook reflects the possibility of us downgrading Vivacom by one notch if the group is unable to refinance the holding company bridge loan on similar terms over the next six months, potentially placing pressure on Vivacom's credit metrics. We could lower the rating on Vivacom if its parent fails to adequately refinance the bridge loan over the given timeframe with another payment-in-kind instrument. We could also downgrade Vivacom if it meaningfully underperforms compared with our base case, leading to adjusted leverage of more than 4x and an FOCF-to-debt ratio of below 5%. We would consider a more aggressive financial policy than we currently anticipate as deviating from our base case, and this could also lead to a downgrade. An example of how the company might adopt a more aggressive financial policy would be if it increases its debt level to the higher end of the range allowed under its incurrence covenant. We could revise the outlook to stable over the next 12 months if Vivacom successfully refinances the bridge loan with a long-term debt instrument. In order to avoid placing significant pressure on Vivacom's free cash flow generation following a refinancing, the majority of the outstanding loan would need to be refinanced at the parent level, on relatively similar terms as the existing one."
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