VIVACOM NEWS
Moody's changes Vivacom's outlook to positive
2017-07-26 13:13:04.420 GMT
London, 26 July 2017 -- Moody's Investors Service ("Moody's") has today changed to positive from stable the outlook on the ratings of Bulgarian Telecommunications Company EAD ("Vivacom"). Concurrently, Moody's has affirmed the company's B1 corporate family rating (CFR), its B1-PD probability of default rating (PDR), and the B1 rating on the company's
EUR400 million senior secured notes due 2018.
"The change in outlook to positive reflects Vivacom's track record of solid operating cash flow generation and modest leverage, as well as its more conservative financial policies, as the company has recently reduced its reported leverage target to below 2.5x, from 3.0x," says Alejandro Núñez, a Moody's Vice President -- Senior Analyst.
A full list of affected ratings can be found at the end of this Press Release.
RATINGS RATIONALE
Vivacom's B1 ratings reflect: (1) the company's position as a leading telecom operator in Bulgaria with strong market shares in fixed-line telephony and fixed-line broadband; (2) Vivacom's strong track record of growing its mobile segment's market share and revenues; (3) the company's modest leverage with Moody's adjusted Gross Debt / EBITDA expected around 2.7x at year-end 2017; (4) its diversified business model, with offers in fixed-line voice, broadband internet, mobile and pay-TV; (5) expectations of improved free cash flow generation in the coming years supported by EBITDA growth, reduced working capital outflows due to lower receivables and predictable capex spending.
The rating also reflects: (1) the company's relatively small scale in the global telecommunications industry compared with peers as a result of its limited geographical focus in Bulgaria; (2) the competitive telecom market landscape in Bulgaria and its resulting low Average Revenues Per User (ARPU) generated as well as potential payments in upcoming mobile spectrum auctions; (3) continuous revenue pressure as a result of the structural decline in fixed-line voice services and price pressures in the corporate/small enterprises segment; (4) the potential for a change in the Viva Telecom shareholding structure, which is subject to existing litigation cases at the level of holding companies outside the Vivacom restricted group; (5) the overhang resulting from the EUR240 million debt sitting at Viva Telecom (Luxembourg), the 100% owner of Vivacom, which is mitigated by the strong covenant package and restricted payments limitations in Vivacom's debt documentation; and
(6) the need to address the refinancing of the company's EUR400 million senior secured notes due November 2018, for which the company is already exploring financing plans.
Moody's expects that after 2018, Vivacom's capex spend will decline on both an absolute basis and relative to revenues, such that capex/revenues will be under 20% in 2019, following two years of elevated investments in the national 4G network. As a result, the rating agency anticipates that Vivacom will generate increasing operating and free cash flow, relative to 2015-2016 levels, while maintaining an adequate level of network reinvestment to support its future growth and competitiveness.
Vivacom has also proven its adherence to a conservative financial policy over the past two years and has recently reduced its financial leverage target to a range of 2.0-2.5x net debt/EBITDA (company-reported) from 3.0x previously. Moody's anticipates that Vivacom's reported net leverage will be toward the higher end of that range at year-end 2017 before declining toward the lower half of that target range in 2018.
RATIONALE FOR POSITIVE OUTLOOK
The change in outlook to positive from stable primarily reflects the improvement in operating cash flow generation over the past two years, which Moody's anticipates will rise over the next two years, and the expectation that leverage will continue to remain modest, at around 2.7x over the next two years, below the 3.0x threshold for a possible upgrade to Ba3. This is further supported by the company's recent change in leverage target, which was reduced to a range of 2.0x-2.5x Net debt/EBITDA (company-reported), from 3.0x prior to 2016.
The positive outlook reflects Moody's expectation that Vivacom will continue its steady operating momentum, moderate leverage and adherence to its 2.0x-2.5x net debt/EBITDA leverage target.
It also reflects the expectation that Vivacom will successfully refinance its eurobond maturing in November 2018 well ahead of maturity.
WHAT COULD CHANGE THE RATING UP / DOWN
Upward pressure on the rating could develop if the company's adjusted leverage remains below 3.0x on a sustained basis, while it generates meaningful positive free cash flow.
Downward pressure on the ratings could arise should Vivacom's operating performance weaken or should the company incur additional indebtedness, such that its adjusted leverage ratio moves towards 4.0x. Negative ratings pressure would also arise should the company's free cash flow generation deteriorate leading to a weakening in the company's liquidity profile.
Failure to address the refinancing of the November 2018 bond maturity on a timely manner would also lead to downward pressure on the rating.
LIST OF AFFECTED RATINGS
Affirmations:
..Issuer: Bulgarian Telecommunications Company EAD
....LT Corporate Family Rating, Affirmed B1
....Probability of Default Rating, Affirmed B1-PD
....Senior Secured Regular Bond/Debenture, Affirmed B1
Outlook Actions:
..Issuer: Bulgarian Telecommunications Company EAD
....Outlook, Changed To Positive From Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017. Please see the Rating Methodologies page on
www.moodys.com for a copy of this methodology.
Bulgarian Telecommunications Company EAD ("Vivacom") is the national telecom incumbent and leading integrated operator in Bulgaria (Baa2 stable), providing mobile, fixed-line telephony, fixed-line broadband and pay-TV (both DTH and IPTV) services nationwide. Vivacom is a fully integrated operator that offers quadruple-play services nationwide in Bulgaria and benefits from its leading position in fixed-line telephony business with a 82% revenue share and the largest player in fixed-line broadband with a 26% subscriber market share (as of December 2016). In addition, Vivacom is Bulgaria's third-largest mobile operator (28% revenue market share as of March 2017), providing post-paid services to both residential and business customers and pre-paid services to residential customers with a total of 3.1 million subscribers. In its fiscal year 2016, the company generated total revenue of BGN875.3 million (EUR447.5 million, at a Bulgarian lev pegged to the Euro at
BGN1.95583/EUR) and company-adjusted EBITDA of BGN310.6 million
(EUR158.8 million). As of March 2017, Vivacom's revenue mix was 57% mobile, 15% fixed voice, 11% fixed data, 8% pay-TV and 9% other telecommunications services.
