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Fitch Upgrades eir to 'B+'; Outlook Stable
February 8, 2017 / 5:06 PM / 9 months ago

Fitch Upgrades eir to 'B+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, February 08 (Fitch) Fitch Ratings has upgraded Ireland-based eircom Holdings (Ireland) Limited's (eir) Long-Term Issuer Default Rating (IDR) to 'B+' from 'B'. The Outlook on the IDR is Stable. Fitch has simultaneously upgraded eir's senior secured ratings to 'BB-'/Recovery Rating 'RR3' from 'B+'/'RR3'. A full list of rating actions is available at the end of this commentary. The upgrade reflects eir's improved operational performance and free cash flow (FCF) generation leading to lower leverage as eir continues its successful business transformation. FCF should improve further over the medium-term even with stable capex as EBITDA continues to grow and cash restructuring costs fall, resulting in a deleveraging profile. KEY RATING DRIVERS Improving Competitive Position: In spite of a competitive retail market, eir is able to defend its market position. Recent content acquisitions have enhanced the company's converged fixed and mobile offering. Combined with a new corporate brand and an increased focus on improving customer experience, this should continue to reduce broadband churn and help curtail retail access line losses. Increasing Multi-Play Penetration: eir has been able to increase multi-play penetration of its customer base to 23% at end-December 2016, with its high-speed broadband offering, third-placed mobile position (20% handset subscriber market share) and a small but growing pay-TV position. Increased focus on content and bundling is crucial in competing against strong multinationals such as Virgin Media, Vodafone and Sky. Fibre and 4G Network Investment: eir has invested heavily in its fibre network rollout and LTE deployment (now at 95% population coverage) over the past few years to become Ireland's leading fibre and fixed-mobile converged network. The company's fibre network at end-2016 passed 1.6 million premises (68% of Irish premises) and connected 31% of customers, and is on track to pass 1.9 million premises by end-2018. This network investment has underpinned the introduction of higher value customer bundles, which has led to underlying year-on-year revenue growth of 3.2% for 2Q of the financial year ending June 2017 in eir's consumer segment. Twenty-three per cent of eir's fixed line consumer customers are taking either a triple- or quad-play bundle of services (fixed voice, broadband, TV and/or mobile), while 42% of eir's consumer mobile customers are on a post-pay contract. National Broadband Plan Win Possible: eir is participating in a bidding process for the government's national broadband plan, which would see high-speed broadband deployed to approximately 927,000 premises (the current intervention footprint as of July 2016) in the rural part of Ireland. We expect eir to win the bidding for one of the two regions, which is likely to keep capex at around current levels over the medium-term. This is a complex project and we expect the government to announce contract awards towards end-2017. The government is still considering how eir's current plans to roll out its fibre-to-the-home network to approximately 300,000 rural premises may affect the proposed area covered by the government's intervention area. Regulatory Changes: eir's FY17 mobile revenue is going to be negatively impacted by a decrease in mobile termination rates but the impact on group EBITDA is going to be neutral. The reduction in analogue wholesale line rental prices from 1 July 2016 should be partially offset by the increase in next generation access (ie fibre) bitstream wholesale prices from 1 September 2016. We believe this gives eir a higher return on its fibre investment when its competitors use its network, and should reduce the intensity of retail fibre price competition. Improving EBITDA: eir's underlying revenue and EBITDA increased 2% year-on-year in 1HFY17. Reported revenue growth for the same period was 1%, including mobile termination rate declines and the FX impact from a small GBP exposure. eir's efficiency programme focusing on product simplification and rationalisation continues to support profitability with EBITDA margin improving 0.7pp in 1HFY17. We expect EBITDA to grow slightly over the medium-term, with EBITDA margin stabilising at 39%. Growing FCF Generation: Even though we expect capex to remain stable with further fibre investment, FCF generation should improve as cash restructuring costs decline over time. As the restructuring costs normalise and become part of ongoing operations, these will not be treated as one-off items in our calculation of eir's credit metrics. eir also benefits from significant reduction in interest cost following the company's bond refinancing, and the repricing of its senior credit facility in October 2016. We expect eir's FCF margin over the medium-term to be around the mid-single digit range, leading to funds from operations (FFO)-adjusted net leverage trending towards 4.5x. We believe eir's management is committed to reducing leverage, having previously explored the potential of a public listing, and having made a EUR52 million voluntary debt repayment in 1HFY17. DERIVATION SUMMARY Relative to its European telecoms incumbent peers, eir has higher leverage, a smaller size, a largely domestic focus, and the lack of leadership in the mobile segment. Its EBITDA margin is similar to its peers, but pre-dividend FCF margin is lower, mainly due to higher capex as a percentage of revenue and cash restructuring costs. No parent/subsidiary linkage or Country Ceiling constraint is applicable. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for eir include the following: - Low single-digit revenue growth through to FY19; - Stable EBITDA margin of around 39% from FY17 to FY19; - Cash tax of around EUR20 million p.a. from FY18; - Cash outflows related to restructuring provisions and onerous contracts around EUR40 million in FY17 and decreasing thereafter; - Capex at 22% of revenues in FY17 and FY18, reducing to 21% in the following two years; - No material M&A RATING SENSITIVITIES Positive: Future developments that may collectively lead to an upgrade include:- -FFO adjusted net leverage expected to remain at or below 4.5x on a sustained basis; -FCF margin expected to be consistently in the mid-single digit range, with ongoing revenue stability and EBITDA improvement; -Strengthened operating profile and competitive capability demonstrated by stable fixed broadband market share with increasing fibre penetration and mobile market share; Negative: Future developments that may, individually or collectively, lead to a downgrade include:- -FFO adjusted net leverage above 5.0x on a sustained basis; -Weaker cashflow generation with FCF margin expected to remain in the low single digit percentages, driven by lower EBITDA or higher capex; -Deterioration in the regulatory or competitive environment leading to a material reversal in positive operating trends. LIQUIDITY Strong Liquidity: eir had an undrawn EUR150 million revolving credit facility (expires 2021) and EUR105 million in cash at end-2016. The company's growing FCF adds to the company's strong liquidity position. eir's senior secured notes and credit facility are due in 2022. FULL LIST OF RATING ACTIONS eircom Holdings (Ireland) Limited -Long-Term IDR upgraded to 'B+' from 'B'; Outlook Stable eircom Finance Designated Activity Company -Senior secured rating: upgraded to 'BB-'/'RR3' from 'B+'/RR3 eircom Finco S.a.r.l --Senior secured rating: upgraded to 'BB-'/'RR3' from 'B+'/RR3 Contact: Principal Analyst Alexander Cherepovitsyn, CFA Analyst +44 20 3530 1755 Supervisory Analyst Damien Chew, CFA Senior Director +44 20 3530 1424 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Nikolai Lukashevich, CFA Senior Director +7 495 956 9968 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. 27 Sep 2016) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1018723 Solicitation Status here 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. 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