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Fitch Revises Cellnex's Outlook to Negative; Affirms at 'BBB-'
May 26, 2017 / 10:16 AM / 7 months ago

Fitch Revises Cellnex's Outlook to Negative; Affirms at 'BBB-'

(The following statement was released by the rating agency) LONDON, May 26 (Fitch) Fitch Ratings has revised Spain-based Cellnex Telecom S.A.'s (Cellnex) Outlook to Negative from Stable while affirming the Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. The Negative Outlook follows Cellnex's plan to acquire a 54% stake in Swiss Towers AG for EUR171 million, which Fitch believes will likely be successfully completed. Cellnex intends to fund the acquisition using existing cash and debt resources. Based on Fitch's base case projections, without further improvement in the company's organic deleveraging capacity following the transaction Cellnex is unlikely to be able to bring funds from operations (FFO) adjusted net leverage to below the agency's downgrade sensitivity of 5.0x by 3Q19. This is based on a deconsolidated view of Swiss Towers AG due to the funding structure of the potential new subsidiary. KEY RATING DRIVERS Geographic Expansion: Cellnex announced that it intends to acquire a 54% stake in Swiss Towers in a consortium with investment partners Deutsche Telekom Capital Partners (DTCP) and Swiss Life Asset Managers who will each take a 28% and 18% stake respectively. Swiss Towers is a subsidiary of Sunrise Communications International, which houses the company's 2,239 mobile tower portfolio. In addition to the acquisition, Cellnex and Sunrise have also agreed to the deployment of additional sites on a 'build to suit' basis and the deployment of 200 Distributed Antenna System nodes. Strong Operating Profile Unchanged: As part of the acquisition of Swiss Towers, Cellnex has entered into a 20-year master services agreement (MSA) with Sunrise. The agreement is extendible by a further 20 years on an all or nothing renewal basis under the same terms. The MSA enables Cellnex to preserve the visibility and stability of its cash flows as it provides a pre-determined pricing mechanism with visibility on associated service costs and capex requirements. Fitch views the incremental cash flows generated by the projects as carrying broadly similar levels of risk to Cellnex's existing tower portfolio. Increase in Leverage: Cellnex is currently managing a spike in leverage as a result of previous acquisitions and expansion projects. Prior to the Swiss Towers AG investment, Cellnex was on track to reduce FFO adjusted net leverage (leverage) to 5x by 3Q19. Without improvements in retained free cashflow (FCF) or further debt reduction the investment in Swiss Towers, Cellnex is unlikely to achieve this goal. Leverage sustained above 5x on a consistent basis would not be compatible with a 'BBB-' rating, leading to today's Outlook revision. A downgrade to the rating would occur in the next six to 12 months depending on the financial performance of the company. Fitch also views that a financial policy and strategy leading to continuous M&A-induced leverage spikes such that leverage is more often above 5x than below as being negative for the rating at 'BBB-'. Funding Structure Leads to Deconsolidation: Cellnex and its consortium partners intend to finance the acquisition of Swiss Towers through EUR316 million of equity and EUR142 million non-recourse debt. As the non-recourse debt will be in the form of senior secured debt, Fitch's base case analysis of Cellnex's credit profile will be performed with Swiss Towers deconsolidated from the group. This assumes sufficient financial reporting by Cellnex. A lack of which may lead to a more cautious stance to the rating. Put Option Flexibility: As part of the transaction, DTCP has the right to sell its stake in Swiss Towers via a put option to Cellnex. The option is payable in cash or in shares. Fitch's base case forecasts assume that no payment is made in cash for at least the next three years. Should a cash payment for the stake be made during this time the impact would be to increase leverage by around 0.1x. DERIVATION SUMMARY The stability and visibility of cash-flow streams drive Cellnex's ratings. This is derived from inflation-linked long-term contracts of the company's mobile towers portfolio and a scalable, cash-generative business model with low capital intensity requirements and demand-driven capex that reduces investment risks. These factors provide Cellnex significant discretion to manage its credit profile and enable the company to sustain higher leverage per rating band relative to network telecom operators. The levels are, however, lower than American peers' due to the latter's significantly higher domestic market share of mobile tower operations and lower mix of revenues from broadcast tower infrastructure. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer (excluding the acquisition of Swiss Towers) include: -Reported revenue growth of 17% in 2016, driven by acquisitions and the recovery of Spanish TV broadcasting, 9% to 10% per year for 2017 and 2018 (broadly reflecting improvements in tenancy ratios, build-to-suit projects and inflation increases that are partially offset by a decline in average revenue per tenant); -EBITDA margin around 40% in 2016, increasing to 47% by 2019, reflecting acquisitions, efficiency measures and improvements in tenancy ratios; -Discretionary expansion capex of 8%-9% of revenue (excluding build-to-suit capex in France) which, alongside maintenance capex, increases total non-M&A capex to 11%-12% of revenues annually; -Lease-adjusted debt around EUR900 million at end-2016, based on a blended lease multiple of 7.7x, reflecting 5x multiple relating to satellite lease expenses and 8x multiple for tower rental and other operating lease expenses; -Dividend payment of EUR22 million in 2017; -Put option of Wind Telecomunicazioni SpA is treated as debt; -Acquisition of Swiss Towers, funded by contribution from Cellnex. along with financing at the subsidiary level. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -A decrease in FFO-adjusted net leverage to below 4.5x on a sustained basis, which could lead to an upgrade to 'BBB'; -Fixed charge cover of 3.0x or higher (2016E: 2.8x); -The Outlook could be changed to Stable if in the short-term Cellnex is able to demonstrate improved financial performance and a financial policy and strategy that will sustain leverage at a level that is consistently compatible with a 'BBB-' rating. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Failure to reduce FFO-adjusted net leverage to below 5.0x on a sustained basis by end-3Q19, three years after the acquisitions of CommsCon, Shere Group, Protelindo NL and 230 of Bouygues' tower assets, with no significant and consistent deleveraging progress during this period; -Deterioration in FCF generation detracting from the company's ability to reduce leverage; -FCF margin below 10%, while leverage is higher than the threshold for the 'BBB-' rating, would be a risk; -Future acquisitions that reduce the company's financial flexibility and deleveraging capacity from current levels of FFO adjusted net leverage of 0.5x-0.6x per year, in the absence of sufficient debt reduction measures; -Fixed charge cover remaining below 2.5x for a sustained period. LIQUIDITY Strong Liquidity: Cellnex generates strong FCF and has no significant debt maturities over the medium term. A EUR500 million revolving credit facility due 2023 (undrawn at end-3Q16) along with credit facilities of EUR325 million due 2019/21 (partially drawn at end-3Q16) provide further liquidity over the next five years. Contact: Principal Analyst Joe Howes Analyst +44 20 3530 1382 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 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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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