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Fitch Rates Eutelsat at 'BBB'; Outlook Stable
December 14, 2016 / 5:09 PM / 9 months ago

Fitch Rates Eutelsat at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) LONDON, December 14 (Fitch) Fitch Ratings has assigned Eutelsat Communications S.A. a Long-Term Issuer Default Rating (IDR) of 'BBB' and Eutelsat S.A. a senior unsecured rating of 'BBB'. The Outlook on the IDR is Stable. Eutelsat is a leading global satellite operator with a strong position in the video segment that underpins its cash-flow generation, credit profile and ratings. Pressure on EBITDA and an increase in capital leases during the financial year to June 2016 (FY16) has removed headroom within the rating in the short term. However, underlying cash-flow generation remains robust, providing scope to withstand pressure, and capacity and flexibility to gradually improve leverage. Maintaining this capacity and flexibility is core to sustaining Eutelsat's rating. KEY RATING DRIVERS Video Segment Supports Profile Eutelsat generates over 64% of its revenues (FY16) from the video segment where the company has a strong competitive position which is supported by entry barriers created from the ownership of regulated, orbital positions and frequencies. This enables the company to maintain high capacity utilisation rates which combined with typical four- to five-year customer contracts drive strong EBITDA margins (around 75% at group level) and provide stability and visibility to cash flows. Fitch expects revenues in the segment will benefit from modest growth. This reflects sustained growth in emerging markets offset by stable growth in Europe. Emerging-market growth will be driven by increases in channel numbers and HD content, while growth in HD and UHD content in Europe is likely to be offset by improvements in compression technology. Managing Data Overcapacity The launch of high throughput satellites by major satellite operators has led to an oversupply of data capacity in certain regions that is resulting in pricing pressure. The segment as a result is likely to remain structurally challenged in the short to medium term. Eutelsat has a moderate exposure to the segment, which accounts for 16% of revenues. Fitch expects that this will decline to around 11% by 2020, with a potential negative impact on group EBITDA margin of 1% to 2%. This reflects further pricing pressure that is partially offset by volume improvements. Focus on Preserving Cash Flows Pricing pressure on data services and a gradual stabilisation of declining revenues in the government services sector (13% of FY16 revenues) are likely to reduce EBITDA over the next two years. Fitch's rating-case forecasts assume a total EBITDA decline of around 6% by FY18. Eutelsat is likely to offset the decline at the free cash-flow (FCF) level as a result of a combination of cost control, reduced interest costs, lower cash taxes and reductions in capital expenditure. Financial Flexibility and Leverage Policy Eutelsat's funds from operations (FFO) adjusted net leverage is likely to remain marginally above its 4.0x threshold for a 'BBB' rating, at 4.1x in FY17 as a result of pressure on EBITDA and increases in capital lease commitments. The company's underling FCF generation remains robust, with pre-dividend FCF margins growing to around 25% in FY19 from around 19% in FY17. This should enable the company to reduce its leverage to below 4.0x within a 12 to 18 month period while fulfilling commitments to a cash-based progressive dividend policy. Eutelsat has announced the exercise of the put option on its 33.7% stake in Hispasat and discussions with Viasat about a JV to which Eutelsat would contribute some assets, and from which it would receive a one-off cash sum of EUR132.5m. These proceeds are not included in Fitch's base-case forecasts for the rating. Eutelsat has not given any indication on use of proceeds from the asset sales, however they can provide Eutelsat with additional financial flexibility if needed. Revenue visibility, strong EBITDA margins, ability to reduce capex and a flexible financial policy have provided both capacity and flexibility to manage leverage. This aspect is core to Eutelsat's rating, enabling the group to adjust its financial profile to meet changes in the operating environment such as pressure in the data segment. It is also reflected in the ratings ability to sustain some leverage above the threshold of a 'BBB' level for short duration. Structural Subordination of Holding Company At the end of June 2016, Eutelsat had Fitch defined total gross debt of EUR 5,134m of which EUR600m was issued by parent Eutelsat Communications with the remainder by subsidiary, Eutelsat S.A. Given that there are no guarantees between the parent and subsidiary, the amount of debt issued by Eutelsat S.A., which is greater than 2.5x EBITDA, leads to structural subordination of the debt issued by Eutelsat Communications. Under Fitch's methodology, debt issued by Eutelsat Communications would be rated lower than the debt issued by Eutelsat S.A. DERIVATION SUMMARY Stable and visible cash-flow streams combined with strong cash generation underpin Eutelsat's credit profile. A strong competitive position in the video segment drives the bulk of group cash generation. Video segment revenues are typically based on medium- to long-term contracts with a geographically well-diversified customer base. These revenues are supported by entry barriers created from the ownership of regulated, orbital positions and frequencies. Sector risks relating to the threat of substitutes and improvements in compression technology can be managed through maintaining financial flexibility. These factors reduce operating risks and enable the group to manage leverage up to levels similar to those of the large diversified European incumbent operators. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Eutelsat include: - Revenue declines of around 4% in FY17 driven by declining data and government service revenues. Lower declines in FY18 followed by 0.5-1.5% growth thereafter. - EBITDA margins between 75 to 76%. - Capex, including lease payments, of around EUR500m in FY17 declining to around EUR425m per annum thereafter. - Increased cash taxes as Satmex tax losses are fully utilised by FY16. - Reduction in cash interest as debt refinancing leads to lower interest payments.. - Dividend payout ratio of 75% - 90% of net income. - No significant increases in capital lease commitments. - No significant delays in current launch programme. RATING SENSITIVITIES Positive: Developments that may, individually or collectively, lead to positive rating action include: - FFO adjusted net leverage falling sustainably below 3.5x - Visibility that revenues and cash flow will not be adversely impacted by changes in sector trends and market structure Negative: Developments that may, individually or collectively, lead to negative rating action include: - FFO adjusted net leverage remaining sustainably above 4.0x (corresponding to net debt to EBITDA of approximately 3.3x) - A reduction in the ability to delever at a time of sustained negative sector trends - Significant pressure on FCF driven by EBITDA erosion as a result of pricing pressure, protracted contraction of segments, increasing oversupply of global capacity or new competitive entrants along with higher-than-anticipated capital intensity and shareholder remuneration. LIQUIDITY Comfortable Liquidity: At 30 June 2016 the group had EUR1.2bn of unrestricted cash and cash equivalents and had access to EUR650m available under various active lines of undrawn revolving credit. We believe Eutelsat has good access to the capital markets to refinance upcoming maturities as required. Contact: Principal Analyst James Hollamby Analyst +44 20 3530 1656 Supervisory Analyst Tajesh Tailor 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 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. 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