Reuters logo
Fitch Affirms JSC Silknet at 'B+'; Outlook Stable
September 6, 2017 / 2:09 PM / 3 months ago

Fitch Affirms JSC Silknet at 'B+'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW/LONDON, September 06 (Fitch) Fitch Ratings has affirmed JSC Silknet's Long-Term Issuer Default Rating (IDR) at 'B+' with a Stable Outlook. Silknet is the incumbent fixed-line telecoms operator in Georgia with an extensive backbone and last-mile infrastructure across the country. The company holds sustainably strong market positions of above 40% in both fixed-voice and broadband services, and is the largest provider of pay-TV services by revenue. Its lack of significant mobile operations is a strategic weakness, as is its small absolute scale - Silknet services fewer than 350,000 fixed lines and it generated GEL63 million (about USD27 million) EBITDA in 2016. KEY RATING DRIVERS Fibre Strategy: Silknet's fibre strategy improves the company's growth outlook and strengthens its competitive position. However, it also entails execution risks and may lead to a slight increase in leverage. Silknet is undertaking a wide-scale upgrade of its last-mile infrastructure, aiming to rapidly mass-migrate its ADSL customers to fibre. To a degree, this is a defensive strategy, protecting the existing franchise from competition, which is primarily fibre in large cities. Management's plans to increase broadband ARPU and grow revenue from pay-TV services from wider fibre coverage may be challenged by the relatively low disposable income in Georgia (GDP per capita was estimated at USD3,615 in 2016, equal to 37% of the emerging Europe median). ADSL customers typically benefit from lower tariffs, and may be reluctant to pay extra for higher quality and additional services, particularly outside large cities. Modest Growth Outlook: We expect revenue growth to remain in the low-to-mid single digit positive territory, supported by subscriber additions in pay-TV and to a lesser degree, broadband. Voice revenue declines will likely continue unabated, diluting the headline growth. Broadband is the largest segment by far (bringing in close to 50% of Silknet revenues) and we forecast it will see mid-single digit expansion. Revenue growth across the Georgian internet market slowed to 4% yoy in 1H17, from 6% yoy in 2016, and a much higher 16% yoy in 2015 (estimates of the national regulator, GNCC). Strategy May Face Challenges: Urban broadband penetration has reached 70% by household, limiting further growth in the most commercially attractive areas. Management's strategy of growing revenue on the back of higher ARPU from fibre customers may be challenged by competition. Silknet's residential internet ARPU has reached parity with the market, suggesting that the company no longer has a relative price advantage. Threat From Bundled Competition: Silknet is facing the threat of bundled competition, which it would not be able to directly match. Magticom, Silknet's largest rival, keeps on consolidating smaller broadband operators and is capable of bundling broadband, pay-TV and mobile services. Bundled offers have not been actively promoted so far, but significant changes in the market shares of either operator risk their wider use. Improving Profitability: We expect Silknet's profitability to continue steadily improving, as a result of the management's focus on cost cutting, but also the growing contribution from high margin Pay-TV and premium fibre services. The company is unlikely to replicate the step-change in profitability reported in 2016, with EBITDA margin jumping to 39% compared with 32% in 2015. To a large degree, the 2016 improvement was a result of a change in the accounting treatment of installation and other support services, which were spun off into a separate subsidiary, with a significant portion of expenses capitalised. Mobile Lack a Strategic Disadvantage Silknet does not have any significant mobile operations, which we view as a strategic disadvantage. The Georgian mobile market is mature, making an organic entry into the market a less feasible option. The company therefore may explore options to team up or merge with one of the existing mobile operators. Fitch would treat acquisition of an existing mobile operator as event risk. Stable Leverage: A spike in infrastructure investment but also continuing regular dividends, expected by Fitch at above GEL10 million per year, on par with 2016 distributions, will likely push FCF into break-even-to-slightly-negative territory in 2017-2018. We expect that this weakness will be largely compensated by moderately growing EBITDA, leading to stable FFO adjusted net leverage of 2.0x over the period. Dominant Shareholder Influence: The company's 100% shareholder Silk Road Group can exercise significant influence on the company and has access to its cash flows, as demonstrated by bypassing formal restrictions on dividends - Silknet guaranteed GEL35 million of its shareholder's loan in 2016. We treat this guarantee as off-balance sheet debt, and include it in all leverage calculations. Silknet's governance situation is commensurate with its 'B'-range rating category. Silk Road Group does not publicly disclose its financial results. DERIVATION SUMMARY Silknet benefits from its established customer franchise and wide network of a telecoms incumbent, similar to its higher rated emerging markets peers such as Kazakhtelecom (BB+/Stable) and Tattelecom (BB/Stable). However, Silknet is smaller in size with revenue of less than EUR100 million. Unlike its higher rated peers, the company lacks any mobile operations and faces a strong four-play-enabled competitor. Its corporate governance situation is commensurate with a rating in the 'B' category. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Silknet include: - continuing voice revenue contraction, at 10% per year on average; - broadband revenue growth in the mid-single digit range; - double-digit Pay-TV revenue growth in 2017 and 2018; - GEL3 million of IRU proceeds are treated as recurring and included into FFO, with the rest treated as one-offs; - EBITDA margin modestly improving from the 2016 level; - high capex of above 25% of revenues in both 2017 and 2018 moderating to below 20% of revenues by 2020; - regular dividends moderately growing from 2016 level in both 2017 and 2018 RATING SENSITIVITIES Positive: developments that may, individually or collectively, lead to positive rating action include: - stronger FCF generation on a sustained basis, alongside stable operating performance, comfortable liquidity and a track record of improved corporate governance. Negative: developments that may, individually or collectively, lead to negative rating action include: - leverage rising to and sustainably above 3x FFO-adjusted net leverage without a clear path for deleveraging; and - a rise in corporate governance risks due to, among other things, related-party transactions or up-streaming excessive distributions to shareholders. LIQUIDITY As of end-2016 Silknet did not have sufficient liquidity to repay its amortising debt of approximately GEL25 million in 2017. However, the company extended the maturity of its long-term bank debt to 2024 from 2021 reducing its annual refinancing exposure. The same positive impact is likely to be achieved from the GEL34 million bond due in 2022 issued in August 2017, assuming that most proceeds are applied to refinancing the existing bank debt. Silknet relies heavily on TBC (BB-/Stable), its largest creditor and key relationship bank, for refinancing. High refinancing risk is mitigated by Silknet's moderate leverage. Contact: Principal Analyst Irina Andrievskaia Associate Director +44 20 3530 1715 Supervisory Analyst Nikolai Lukashevich, CFA Senior Director +7 495 956 9968 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Committee Chairperson Damien Chew, CFA Senior Director +44 20 3530 1424 Summary of Financial Statement Adjustments - Amortisation of content rights is treated as a cash-like operating expense Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@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 Corporate Rating Criteria (pub. 07 Aug 2017) here Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) 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

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