March 30, 2017 / 1:52 PM / 6 months ago

Fitch Assigns Telenet's New Term Loans Expected 'BB(EXP)'

(The following statement was released by the rating agency) LONDON, March 30 (Fitch) Fitch Ratings has assigned Telenet International Finance S.a.r.L.'s Term Loan AH and Telenet Financing USD LLC's Term Loan AI an expected rating of 'BB(EXP)'. Both issuing entities are subsidiaries of Telenet BVBA (Telenet; formerly Telenet NV). The final rating is contingent upon the receipt of final documentation conforming materially to the preliminary documentation reviewed. Telenet is issuing two new senior secured term loans, the proceeds of which will be used to partially refinance existing bank debt in a leverage-neutral transaction. Term Loan AI will have a minimum tranche size of USD1,000 million and an 8.25-year tenor, and Term Loan AH will have a minimum tranche size of EUR750 million and a nine-year tenor. The transaction is part of the company's strategy to refinance prior to maturity and maximise tenor. The new term loans will be guaranteed by Telenet Financing USD LLC, Telenet BVBA, Telenet International Finance S.a.r.L. and Telenet Group BVBA. KEY RATING DRIVERS Strong Operating Position: Telenet operates a cable network within Flanders and some parts of Brussels. Consolidation of local loop unbundling providers has resulted in duopolistic competition in infrastructure-based fixed line within the consumer segment. Fibre-to-the-home deployment from incumbent Proximus has so far been at a slower pace than in other western European markets such as France, Spain and the Netherlands. Within its franchise area, Telenet services around 70% of households, to which it provides TV, broadband or fixed-line telephony. This provides the company with sufficient scale to generate a stable underlying pre-dividend free cash flow (FCF) margin of 12%-14%. Sustaining Competitiveness: Telenet has been able to sustain its leading market position by investing in its network infrastructure, providing rich, value-for-money content bundles and improving customer service. The company has a five-year, EUR500 million capital investment programme that will lift cable network capacity to 1 GHz from 600 MHz currently, enabling broadband downstream speeds of at least 1 Gbps. Competition from Wholesale Regulation Manageable: Belgium introduced cable wholesale regulation in 1Q16. The move will enable third parties to access Telenet's cable infrastructure on a wholesale basis based on a retail minus pricing formula applying to TV and broadband combined. We believe the impact on Telenet is likely to be limited and manageable. The company has sufficient margin in its pre-dividend FCF to weather the impact and maintain funds from operations (FFO) adjusted net leverage below 5.25x or approximately 4.3x net debt to EBITDA, which is at the upper end of the company's target range of 3.5x-4.5x. Factors that constrain market share loss include market maturity and churn levels, the prevalence of triple-play take-up among the subscriber base, and the cost of providing attractive content economically. We believe the greatest loss in market share is likely to be at the more price-sensitive end of the market. Commensurate Shareholder Remuneration: Telenet does not have a fixed shareholder remuneration policy but has a formal policy to manage leverage up to 4.5x net debt to EBITDA. Since 2010, Telenet has managed leverage between 3.5x and 4.3x net debt to EBITDA with the higher end achieved in 2013, following a EUR900m exceptional dividend payment. The approach enables Telenet to link its shareholder remuneration to its growth and operational risk profile. This is credit positive as it provides flexibility for M&A, investment and preservation of its credit metrics if required. Notching of Secured Debt: In line with Fitch's notching criteria, the company's secured debt is rated 'BB', one notch higher than its IDR. The recovery rating on Telenet's senior secured debt is 'RR2' due to the strong expected recovery prospects for Telenet. DERIVATION SUMMARY Telenet's rating is driven by its strong operating profile, which is supported by a favourable market structure and a sustainable competitive position. This enables Telenet to generate robust and stable FCF and support a leveraged balance sheet. The company's leverage target relative to other western European telecoms operators is high and forms a restraining factor to the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for Telenet include: - Stable yoy revenue growth in 2017. - Mid-single-digit yoy EBITDA growth in 2017. - A capex/sales ratio of around 24%. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - A weakening in the operating environment due to increased competition from cable wholesale leading to a larger-than-expected market share loss and decrease in EBITDA. - FFO-adjusted net leverage consistently over 5.25x (corresponding to approximately 4.3x net debt to EBITDA) and FFO fixed-charge cover trending below 2.5x. - A change in financial or dividend policy leading to new, higher leverage targets. Positive rating action is unlikely in the medium term unless management pursues a more conservative financial policy. LIQUIDITY Telenet has a strong liquidity position as a result of internal cash flow generation of EUR120m and undrawn credit facilities of EUR400m. The company has a long-dated debt maturity profile, with the first debt maturity occurring in 2022. Contact: Principal Analyst Alexander Cherepovitsyn, CFA Analyst +44 20 3530 1755 Supervisory Analyst Tajesh Tailor Senior Director +44 20 3530 1726 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Damien Chew, CFA Senior Director +44 20 3530 1424 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. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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