Rating Action: Moody's assigns first-time B2 ratings to Bite; outlook stable
Global Credit Research - 07 Jul 2020
Madrid, July 07, 2020 -- Moody's Investors Service, ("Moody's") has today assigned a first-time B2 corporate family rating ("CFR") and a B2-PD probability of default rating ("PDR") to PLT VII Finance S.a.r.l. ("Bite" or the company), a predominantly mobile operator in the Baltic region. Concurrently, Moody's has assigned a B2 rating to the proposed E620 million senior secured bonds due 2026 to be issued by Bite. The outlook is stable.
The proceeds from the notes together with E28.5 million cash on hand will be used (1) to repay E449 million of existing debt; and (2) to pay E199 million in shareholders distribution and transaction costs.
"The B2 rating reflects Bite's well-established market positions in Lithuania and Latvia and its strong growth prospects supported by its convergent and cross selling strategy, as well as by consolidation opportunities in the region" says Agustin Alberti, Moody's Vice President-Senior Analyst, and lead analyst for Bite.
"The rating will be initially weakly positioned because of the high leverage with Moody's adjusted gross debt to EBITDA expected to be at 5.4x by year-end 2020" adds Mr. Alberti.
A full list of affected ratings is provided towards the end of the press release.
Bite's B2 rating reflects: (1) its leading position in Mobile and TV segments with appetite to grow in the Fixed broadband area through acquisitions; (2) high quality mobile network, with 99% 4G coverage in Lithuania and Latvia, and leading TV free to air channels and content in the Baltic region; (3) Moody's expectation of continued growth in revenue and EBITDA from the implementation of a cross selling strategy leveraging on Bite's new Pay TV over the top platform service; (4) the benefits from its joint-venture with Tele2 for the sharing of existing mobile networks and future development of 5G technology reducing overall capex needs; and, (5) the strong and growing free cash flow (FCF) generation (excluding one-off dividends recapitalization and acquisitions) of around E30 million in 2020.
Counterbalancing these strengths are: (1) the company's relatively modest scale and scope of operations; (2) its geographical concentration within the Baltic region, mainly in Lithuania (A3 positive) and Latvia (A3 stable); (3) its exposure to more cyclical and volatile advertising revenue; (4) its initial high leverage, with Moody's-adjusted gross debt/EBITDA of 5.4x in 2020; and (5) Moody's expectation for limited de-leveraging over time due to the company's track record of debt-funded acquisitions and dividend distributions.
From a mobile only operator back in 2016 (65% of total pro forma service revenues in 2019), the company has been able to diversify into the media (22% of the pro forma service revenues in 2019) and the fixed broadband segments (13% of the pro forma service revenues in 2019) through several acquisitions that have enhanced the company's competitive position. The company aims to leverage up on its strong TV content through its new over the top platform to continue growing its revenue generating units (RGUs) and to further expand its average revenue per user (ARPU).
The acquisition of Latvian cable TV operator Baltcom in February 2020 for a total enterprise value of around E54 million, has enabled Bite to enter the fixed broadband market and has reinforced its position in the Pay TV segment as the second largest operator in the region. The company has granted an option to purchase a 50% of Baltcom's share capital to a third party industry participant at the same price paid by Bite. The option is exercisable until December 31, 2020 (or, at the option holder's request, a date no later than December 31, 2021). If the option is exercised, Bite will own only 50% of Baltcom's which will be deconsolidated, resulting in 0.3x increase in Moody's adjusted gross leverage.
In May 2020, the company reached an agreement to acquire Lithuanian telecom operator Mezon for a total consideration of around E30 million. The company provides LTE and WiFi internet, and IPTV services. The acquisition also involves the transfer of certain transmission frequency spectrum licenses in Lithuania. The transaction is subject to approval from Lithuanian regulatory authorities and is expected to close in the fourth quarter of 2020. This acquisition will reinforce the convergent strategy of the company in its main market.
Moody's estimates that the company will report broadly stable organic revenue and EBITDA growth in 2020, as weakness in the media segment generated by the coronavirus outbreak will not be compensated by growth in the mobile and broadband segments. The rating agency forecasts organic growth to pick up again to mid-single digit rates from 2021 onwards, as the economy in the Baltic region recovers and the company continues to implement its cross selling and upselling strategy.
The rating agency expects the company to reduce leverage levels on the back of strong EBITDA growth with estimated gross Debt/EBITDA of 4.9x and 4.6x in 2021 and 2022 respectively, absent of any additional debt financed acquisitions.
Strong and growing free cash flow generation (excluding one-off dividends recapitalization and acquisitions) of around E30 million in 2020, will benefit from the sound operating performance and contained overall capex needs (12% of sales in 2020). The company has established a JV with Tele2, covering its mobile networks in Lithuania and Latvia, which will allow to drive efficiencies in existing networks and reduce investments needs in the 5G deployment from 2021 onwards. Moody's notes the benefits of this agreement in terms of capex and opex savings, although there is some uncertainty as the deal could be subject to regulatory scrutiny.
Governance considerations, which Moody's takes into account in assessing Bite's credit quality, relate to management's proven track record with the company consistently growing revenues and EBITDA and successfully integrating past acquisitions over the last four years. Management's c.15% equity ownership and, therefore, its commitment to the strategy of the company is credit positive. However, the company is controlled by funds managed by Providence Equity Partners with a c.85% equity stake. As is often the case in highly levered, private equity sponsored deals, owners have a high tolerance for leverage/risk, as demonstrated by the significant re-leveraging of the company as part of this transaction, and governance is comparatively less transparent.
Moody's considers Bite's liquidity profile as good, supported by strong and improving free cash flow generation. At transaction closing, the company will have cash and cash equivalents of E25 million and a E50 million super senior revolving credit facility (SSRCF) due 2025, fully undrawn.
The company will not have any material maturities until 2025, when the SSRCF matures. The SSRCF contains one leverage-based maintenance covenant set at 7.5x (net debt/consolidated EBITDA, tested when the RCF is at least 35% drawn on a quarterly basis).
Bite's probability of default rating is B2-PD based on an expected family recovery rate of 50%. The company's capital structure comprises a E620 million senior secured bond due 2026 and a E50 million SSRCF maturing in 2025.
The B2 rated bonds and the unrated SSRCF benefit from the same security and guarantee structure. Bite's bonds are secured against share pledges, bank accounts and receivables of key operating subsidiaries, and benefit from guarantees from operating entities accounting for 88.9% of group EBITDA (excluding Guarantors and non-guarantors with negative EBITDA) and 77.7% of group assets as of March 31, 2020. The unrated SSRCF ranks ahead of the notes in an enforcement scenario. Given the relatively small size of the SSRCF ranking ahead of the senior secured notes, the notes are rated B2, at the same level as the CFR.
RATIONALE FOR STABLE OUTLOOK
The stable outlook on the ratings reflects Moody's expectation that Bite will report a solid operating performance, with moderate revenue growth from 2021 and small margin improvement; will maintain its credit metrics in line with the parameters defined for the B2 rating; and will manage liquidity in a prudent manner.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward rating pressure could develop if Bite delivers on its business plan, such that its Moody's-adjusted debt/EBITDA remains below 4.25x on a sustained basis, the company generates positive FCF -- after capital spending and dividends -- on a sustained basis, and there is a track record of prudent liquidity management.
Downward rating pressure could be exerted if Bite's operating performance weakens such that its Moody's-adjusted debt/EBITDA rises above 5.25x and the company's FCF generation deteriorates. A weakening of the company's liquidity could also lead to downward pressure on its rating.
LIST OF AFFECTED RATINGS
..Issuer: PLT VII Finance S.a.r.l.
....Probability of Default Rating, Assigned B2-PD
....Corporate Family Rating, Assigned B2
....Senior Secured Regular Bond/Debenture, Assigned B2
Outlook Action: ....Outlook, Assigned Stable PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Bite is a predominantly mobile operator in the Baltic region. The company offers a full range of integrated services such as fixed, mobile and Pay-TV offers to residential and business customers. The company is fully owned by Providence Equity Partners. In 2019, Bite generated revenue and company-reported EBITDA of E389 million and E123 million, respectively.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Agustin Alberti Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service Espana, S.A. Calle Principe de Vergara, 131, 6 Planta Madrid 28002 Spain JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Ivan Palacios Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Espana, S.A. Calle Principe de Vergara, 131, 6 Planta Madrid 28002 Spain JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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