London, 05 December 2012 -- Moody's Investors Service has today downgraded the corporate family rating (CFR) and probability of default rating (PDR) of Magyar Telecom B.V. ("Invitel") to Caa3 from Caa1. Moody's also downgraded the rating on the senior secured notes due 2016 to Caa3 from Caa1. The outlook remains negative.
RATINGS RATIONALE
The downgrade of Invitel's ratings mainly reflects our expectation that the newly announced infrastructure tax, to be introduced from January 2013, will negatively impact Invitel's already weak liquidity profile. Absent any shareholder support -- of which there has been no indication to date -- we expect the company to face a liquidity shortfall during 2013.
The downgrade also reflects (i) Invitel's continued negative operating performance, with revenues and reported EBITDA declining in Q3 2012 by 8% and 20% respectively year-on-year (ii) the weak macro-economic environment in Hungary, where we expect GDP in 2012 to fall by around 1.4% (iii) the unpredictable policy-making environment, as evidenced by the various taxes imposed by the government at short notice (iv) our concerns that the company's current capital structure appears unsustainable.
Invitel's Caa3 CFR continues to recognise the company's (i) leading position as the second-largest fixed-line telecommunications service provider in Hungary; (ii) sound profitability levels with EBITDA margin between 40%-45%; (iii) long dated maturity profile, with no scheduled debt repayment before 2016.
The government has in recent years imposed various taxes on the telecommunication and other industries. These include from 2010 a three year "crisis-tax" on operators which we expect to cost Invitel EUR8 million in 2012, and also a "Telecom Tax" based on end-user traffic.
We expect that the new infrastructure tax which the Hungarian government recently announced will add approximately EUR 9 to EUR 14 million to Invitel's recurring cost base. This would accelerate Invitel's cash burn rate whereby the company could become illiquid within the next two to four quarters. We note that the next interest payment on the 2016 bonds is due on 15 December. The negative rating outlook also reflects this liquidity risk.
Invitel's operating performance in the first nine months of 2012 shows no halting of the declining trends observed in voice revenues with this segment recording a 23% drop in residential voice revenues and a 6% drop in corporate revenues (both in constant currency terms) in 9M 2012 vs. 9M 2011. In addition to fixed-to-mobile substitution and the bundled telephone offers from cable operators, the increasingly tough competitive environment has also driven prices down as clients look for best-value alternatives in a tough domestic economic climate.
What Could Change the Rating -- Up
Given the immediate liquidity pressures Invitel is facing, there is no upwards ratings pressure absent significant shareholder support that will address the company's near-term liquidity issues.
What Could Change the Rating -- Down
Negative ratings pressure would arise following (i) no apparent resolution over the inadequacy of Invitel's current liquidity profile or explicit support from the sponsor; (ii) further reduction in the company's free cash flow generation.
