May 15, 2017 / 2:10 PM / 4 months ago

Fitch Affirms TDC at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 15 (Fitch) Fitch Ratings has affirmed Denmark-based TDC A/S's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. The Outlook is Stable. A full list of rating actions is at the end of this commentary. TDC has improved leverage headroom within its rating over the past 12-24 months through a combination of dividend cuts, hybrid securities and asset sales. The company's strategy to reduce the decline in EBITDA is having some success and can be seen in 1Q17 results. However, visibility on the impact to cash flows from domestic competition and regulatory changes, although improving, remains weak. This has led to a more cautious set of forecasts in Fitch's base case scenario for the company. TDC is likely to sustain a free cash flow (FCF) margin of around 5% over the next two years, providing some financial flexibility to manage further operational pressure should it arise. KEY RATING DRIVERS Domestic Uncertainties Remain: Competition in the mobile and business segments of the Danish telecoms market is likely to remain high, driven by mobile operators such as Hutchison seeking build scale and public sector tenders that are highly price sensitive. Combined with industry sector uncertainties relating to the impact of European mobile roaming regulation, "cord cutting" and voice revenue declines the visibility on domestic EBITDA progression remains weak. This has led to a more cautious stance in Fitch's FCF forecasts for the company. The company has scope to weather further pressure if it materialised at its current 'BBB-' with FFO adjusted net leverage 3.7x. Cautious Base Case View: Fitch's base case scenario for TDC envisages a stable FFO-adjusted net leverage profile over the next two years. This reflects potential declines in FFO offset by reduction in net debt as a result of retained FCF. We forecast a sustainable FCF margin of around 5% over the next two to three years. However, quicker-than-expected stabilisation in EBITDA is not unrealistic, and combined with lower ongoing restructuring costs could enable TDC to deleverage faster. Such a scenario would be an upside to Fitch's forecasts that would be positive for the rating. Progress on Reducing Declines: TDC domestic EBITDA declined by an average of 12% a year between 2015 and 2016. At end-1Q17 the company was able to reduce the yoy decline to 3%, indicating that its strategy to reduce costs and focus on bundled product value and quality-based differentiation in conjunction with price increases is working. TDC aims to reduce operating costs by DKK600 million-700 million by 2018 through product rationalisation, simplification and restructuring. We believe most of these savings are yet to show through in TDC's financial metrics but they are likely be key to stabilising the company's EBITDA decline. Fixed-Line Supportive: TDC owns both the incumbent copper network and most of the cable infrastructure in Denmark. This gives it a stronger domestic fixed-line position than its European peers. We view the position as structurally supportive for the company's long-term credit profile due to the lack of alternative fixed-line infrastructure. This enables TDC to sustain slightly higher leverage than peers and is reflected in the marginally higher (0.2x) FFO-adjusted net leverage levels the company can maintain for a given rating category. Current competitive pressures are more prevalent in the mobile and business segments. Improved Leverage Headroom: TDC's FFO-adjusted net leverage reduced to 3.7x in 2016 from 4.6x at end-2014. The improvement was achieved despite a period of EBITDA decline in the domestic market and was largely due to a combination of asset disposals, cuts in dividends and the issuance of hybrid securities. At its current leverage level, the company's rating is comfortably positioned at 'BBB-'. TDC has the potential to deleverage further depending on EBITDA developments. DERIVATION SUMMARY TDC's rating reflects its leading position within the Danish telecoms market. The company has strong in-market scale and share that spans both fixed and mobile segments. The ownership of both cable and copper-based local access network infrastructure reduces the company's operating risk profile relative to its domestic European incumbent peers, which typically have infrastructure-based competition from alternative cable operators. TDC is rated lower than its Dutch market-focused peer Royal KPN N.V (BBB/Stable) due to its higher leverage, lower financial flexibility and early stage of its current cost reduction strategy for 2015-2018. Higher-rated peers such as Orange S.A. (BBB+/Stable), Deutsche Telekom AG (BBB+/Stable) and Telefonica SA (BBB/Stable) have similar strong domestic profiles but also benefit from greater geographic diversification and lower leverage. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - revenue decline of 2.5% in 2017 and 2% in 2018; - broadly stable EBITDA margin of 39%-40% in 2017-2019; - implied capex to sales ratio of 22% in 2017 reducing to 21% by 2019 (including spectrum); - dividends to grow by around 5% a year from 2018. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -The expectation that FFO-adjusted net leverage will fall below 3.7x on a sustained basis -An improvement in TDC's domestic operating environment enabling a sustained stabilisation in domestic EBITDA Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -FFO-adjusted net leverage above 4.2x on a sustained basis -Further declines in the Danish business putting FCF margins under pressure into mid to low single digits. LIQUIDITY Strong Liquidity: TDC has sufficient liquidity, with undrawn revolving credit facilities of EUR500 million available until September 2021 and EUR200 million of bilateral credit facilities available until December 2018 along with available cash and cash equivalents of DKK1,687 million and forecast positive FCF across the rating horizon. FULL LIST OF RATING ACTIONS TDC A/S --Long-Term IDR affirmed at 'BBB-'; Outlook Stable --Senior unsecured notes affirmed at 'BBB-' --Short-Term IDR affirmed at 'F3' --Subordinated hybrid securities: affirmed at 'BB' Contact: Principal Analyst James Hollamby Associate Director +44 20 3530 1656 Supervisory Analyst Tajesh Tailor Senior Director +44 20 3530 1726 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Stuart Reid Senior Director +44 20 3530 1085 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. 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. Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Non-Financial Corporates Hybrids Treatment and Notching Criteria (pub. 27 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below