Bond Seat upgraded to B
TEXT-S&P raises SEAT PagineGialle rating to 'B-'
Fri Oct 12, 2012 12:09pm EDT
Overview
-- Italy-based classified directories publisher SEAT PagineGialle SpA
(SEAT) has improved its financial metrics by significantly reducing
its debt as part of its recent financial restructuring.
-- We are therefore raising our long-term corporate credit rating on the
group to 'B-' from 'CCC' and removing it from CreditWatch positive.
-- The negative outlook reflects our view of a possible downgrade in the
next 12 months if economic conditions continue to deteriorate, and management
fails to stabilize operating performance, resulting in tightening covenant
headroom.
Rating Action
On Oct. 12, 2012, Standard & Poor's Ratings Services raised to 'B-' from 'CCC'
its long-term corporate credit rating on Italy-based classified directories
publisher SEAT PagineGialle SpA (SEAT). The outlook is negative.
We also raised to 'B' from 'CCC+' our issue rating on SEAT's EUR750 million
senior secured notes. The recovery rating on these notes is '2', indicating
our expectation of substantial (70%-90%) recovery prospects in the event of a
payment default.
At the same time, we removed the above corporate credit and issue ratings from
CreditWatch, where they were placed with positive implications on Sept. 12,
2012.
In addition, we assigned our 'B' issue rating to SEAT's new EUR65 million senior
secured notes and EUR686 million senior secured facilities (including a new
EUR90
million revolving credit facility ). We have assigned a recovery rating
of '2' to these notes and facilities, indicating our expectation of
substantial (70%-90%) recovery prospects for creditors in the event of a
payment default.
Rationale
The upgrade reflects our assessment of SEAT's improved financial metrics after
the completion of its financial restructuring. The group has reduced its debt
burden by approximately EUR1.3 billion (including accrued interest) through a
debt-to-equity swap on its existing subordinated notes as part of the
restructuring. We now project Standard & Poor's-adjusted leverage of
approximately 5x on Dec. 31, 2012 (after adjusting EBITDA for the nonrecurring
positive impact of two counts of litigation with Deutsche Telekom AG),
compared with 9x the prior year. As a result, we anticipate that the cost of
debt will likely be reduced by approximately EUR85 million-EUR90 million per
year.
In addition, as part of the debt restructuring, covenant tests on SEAT's debt
have also been reset to reflect the group's business plan, which it laid out
in early 2012.
However, we think that SEAT's business will remain under pressure. We consider
that secular declines in the print directories sector still present a
significant business risk, and players face increasing competition as small
business advertising expands across a greater number of online marketing
channels.
We see increased business risk as the group strives to contain the pressure on
its profit margin that will likely result from operating in a highly
fragmented, competitive, and rapidly evolving market. In particular, over the
medium term, SEAT's strategy is to generate about 80% of its sales from its
online business. In this industry, we believe SEAT will have significantly
less pricing power compared with its former leading position in the
traditional classified directories business.
That said, our assessment of SEAT's business risk profile as "weak" is
somewhat supported by its No. 1 position in the classified directories market
in Italy, and by what we see as its good profit margin and still-high cash
flow generation. Our business risk assessment assumes that the group's
business strategy remains broadly unchanged, even after a new board and CEO
are appointed in late October.
Despite the significant debt reduction, we continue to assess SEAT's financial
risk profile as "highly leveraged" because the group's gross indebtedness is
still high at approximately EUR1.5 billion. Our financial risk assessment also
reflects our uncertainty surrounding the timing and level of an inflection
point in SEAT's revenues and earnings. If there is not a turnaround, covenant
compliance could be an issue as early as the first half of 2014, according to
our projections.
Under our base-case credit scenario, we anticipate a decline in SEAT's
revenues of about 10% in the financial year ending Dec. 31, 2012, with EBITDA
of approximately EUR340 million including the positive impact related to two
counts of litigation recently won by the group's subsidiary Telegate AG versus
Deutsche Telekom AG (BBB+/Stable/A-2). We also anticipate a mid-single-digit
decline in revenues in 2013, with EBITDA (post operating restructuring costs)
in the EUR280 million-EUR290 million range. Thanks to a lower interest
burden--we
estimate interest costs at about EUR120 million-EUR130 million per year--and our
projection of investments broadly in line with previous years at about EUR50
million, we estimate that SEAT's free operating cash flow will improve to
about EUR80 million in financial 2013, allowing the group to fund its debt
amortization requirement of EUR70 million in 2013. We project that adjusted
funds from operations to debt will remain in the low-single-digit area in 2012
and 2013.
Liquidity
We assess SEAT's liquidity profile as "less than adequate" under our criteria.
This is despite the fact that we assess the group's liquidity sources to
exceed uses by 1.2x or more over the next 12 months.
We note that there is significant uncertainty and limited visibility
surrounding the timing and level of the inflection point in SEAT's revenues
and earnings, owing to the group's current weak operating performance and
declining print directories business. These risks led to a capital
restructuring that was completed in early September with more than EUR1.3
billion debt written off. Furthermore, we believe these risks could lead to
further substantial volatility in the group's sources of liquidity, and could
possibly jeopardize covenant headroom as early as 2014.
In our opinion, SEAT's EBITDA will benefit from the impact of Telegate's
successful litigations with Deutsche Telekom, which will hold off tightening
headroom in the next 12 months. Some further covenant relief could be provided
by a carve-out option, which allows SEAT to remove some costs incurred for
research and development expenses (up to EUR30 million in 2013, EUR25 million in
2014) from EBITDA for covenant calculation purposes. However, an inability to
turn around operating performance would significantly reduce covenant headroom
and result in possible covenant compliance issues as early as the first half
of 2014. This could hinder SEAT's ability to refinance its 2015-2017 debt
maturities.
That said, in our view, SEAT's liquidity is supported by our forecast that net
sources of cash will remain positive, even if EBITDA declines by 20%. It also
includes our projection of adequate (more than 15%) headroom under the
maintenance financial covenants in the bank facilities documentation until at
least September 2013. These covenants were reset as part of the restructuring,
and in our view their somewhat loose definition allows some flexibility to
cope with possible operating underperformance in the short term. In fact, in
the next 12 months, we understand that the covenant test will not exclude any
extraordinary profit above the EBITDA reported by Telegate due to successful
litigations with Deutsche Telekom. The group expects to resolve a further,
third bout of litigation with Deutsche Telekom in the fourth quarter of 2012
(although this is not part of our base-case scenario). In addition, SEAT could
potentially remove up to EUR30 million of costs incurred for research and
development in 2013 from EBITDA for covenant calculation purposes.
SEAT's liquidity is further supported by its manageable debt amortization
requirements before the 2015-2016 debt maturities, and our projection of cash
flow generation capacity thanks to SEAT's limited maintenance capital
expenditures (capex) and reduced interest burden.
We assume that, under the scenario outlined above, SEAT's liquidity sources in
the 12 months to Dec. 31, 2013, include:
-- Access to cash balances of about EUR160 million projected on Dec. 31,
2012 (including a fully drawn RCF and approximately EUR75 million-EUR80 million
at
subsidiaries Telegate and TDL Infomedia Ltd.); and
-- Positive operating cash flow generation. We estimate that this could
reach about EUR130 million in financial 2013.
In our opinion, liquidity sources and cash flow generation are sufficient to
cover liquidity uses comprising:
-- Capex of up to about EUR50 million; and
-- Debt amortization of EUR70 million in 2013.
We do not include in our liquidity assessment any possible further proceeds
from the pending (third) litigation between Telegate and Deutsche Telekom.
Recovery analysis
We rate at 'B' SEAT's EUR750 million senior secured notes, EUR65 million new
senior secured notes, and EUR686 million new senior secured facilities
(including a new EUR90 million RCF). The recovery rating on these debt
instruments is '2', indicating our expectation of substantial (70%-90%)
recovery in the event of a payment default.
In order to determine recoveries, we simulate a hypothetical default scenario.
In our hypothetical scenario, we assume continuing pressures on SEAT's
revenues, earnings, and cash flow generation capacity resulting from a
combination of a weak economic climate and continuing secular declines in the
print directories business. Our recovery analysis is based on a valuation of
the group on a going-concern basis, given the size of the group, its
established brand, well-diversified customer base, and decent cash conversion.
Key factors underpinning our recovery ratings are the secured nature of the
debt instruments, numerical coverage in a going-concern valuation, and our
assessment of the most likely legal framework under which a restructuring
would be implemented.
In our view, all of the secured debt instruments benefit from quite a
comprehensive security package, including share pledges over operating
companies and a pledge on material intellectual property. At our hypothetical
point of default in 2015, we value the business at about EUR1.2 billion
(representing a multiple of 5x on our estimated stressed EBITDA at
approximately EUR240 million). Based on limited prior-ranking liabilities and
assuming that senior secured bank facilities rank pari passu with the senior
secured notes, we project numerical coverage in the low end of the 70%-90%
range.
SEAT is mostly an Italian group (90% of EBITDA is generated in Italy), with an
Italian domicile and Italian management. However, the recent restructuring has
been implemented under the U.K. scheme of arrangement. In our opinion, any
possible second round of restructuring is likely to be implemented under
similar conditions. SEAT is a sizable cross-border entity with a fairly
complex capital structure as a listed entity with both senior secured bank
facilities and senior secured notes. In our view, in a distressed situation,
SEAT is likely to seek a consensual restructuring and benefit from using the
U.K. scheme of arrangement, which allows the implementation of a financial
restructuring with a lower creditor approval threshold (75%) than under the
Italian framework. This could avoid a lengthy process that, given the hurdles
to reach a unanimous consensus, could possibly lead to a liquidation scenario.
In such scenario, which is not our base case, recovery prospects for creditors
would be materially lower.
Given that we assess SEAT's centre of main interests (COMI) for restructuring
purposes as the U.K., estimated recovery prospects of more than 70% trigger
one notch of uplift to the issue rating from the corporate credit rating. If
SEAT's COMI for a financial restructuring were Italy, which we consider
provides relatively weak protection for creditors, an equivalent one-notch
uplift would require numerical coverage of more than 90%.
We note that our choice of COMI is heavily influenced by the fact that SEAT
has already completed a financial restructuring using the U.K. scheme of
arrangement.
Outlook
The negative outlook reflects our view of the ongoing pressure on SEAT's
operating performance. In particular, we believe that the structural decline
in SEAT's business could affect covenant compliance and hinder its refinancing
of 2015-2017 debt maturities.
We could lower the rating if it appears likely that the declines in
advertising sales will continue and, consequently, that the group's profits
will not at least stabilize above our EUR280 million-EUR290 million forecast
range
for 2013. This would negatively affect covenant compliance and further hamper
the group's ability to refinance its 2015-2017 debt prior to maturity.
We could revise the outlook to stable if SEAT returned to marked nominal
EBITDA growth, and maintained an "adequate" liquidity profile (including at
least 15% headroom under its maintenance financial covenants). We believe this
scenario would entail an increase in digital revenues, as we anticipate that
trends in print advertising sales at small to midsize publishers will remain
under significant structural pressure.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
Portal, unless otherwise stated.
-- Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct.
1, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers'
Speculative-Grade Debt, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Ratings List
Upgraded; CreditWatch/Outlook Action
To From
SEAT PagineGialle SpA
Corporate Credit Rating B-/Negative/-- CCC/Watch Pos/--
Senior Secured Debt B CCC+/Watch Pos
Recovery Rating 2 2
New Rating
SEAT PagineGialle SpA
SEAT PagineGialle Italia SpA
Senior Secured Debt* B
Recovery Rating 2
*Guaranteed by SEAT PagineGialle SpA
