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Vantage Towers AG -- Moody's assigns a first-time Baa3 issuer rating to Vantage Towers AG; stable outlook

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Rating Action: Moody's assigns a first-time Baa3 issuer rating to Vantage Towers AG; stable outlookGlobal Credit Research - 12 Feb 2021London, 12 February 2021 -- Moody's Investors Service, ("Moody's") has today assigned a first-time Baa3 Issuer Rating to Vantage Towers AG (Vantage Towers). The rating outlook is stable. Headquartered in Düsseldorf, Germany, Vantage Towers is a leading European tower infrastructure company with around 45,500 fully controlled macro sites, and further 14,200 and 22,100 co-controlled macro sites in Cornerstone Telecommunications Infrastructure Limited (Cornerstone) and Infrastrutture Wireless Italiane S.p.A (INWIT) JVs, respectively, and is currently a 100% owned subsidiary of telecom operator, Vodafone Group Plc (rated Baa2, Negative).Moody's understands that the company intends to pursue a listing on the Prime Standard Segment of the Frankfurt Stock Exchange. Vodafone aims to retain a majority stake in Vantage Towers post IPO, given the strategic nature of the tower infrastructure and the potential value creation opportunity.Vantage Towers' reported pro forma Adjusted EBITDA for FY2020 (fiscal year ending 31st March 2020) of EUR814 million (before lease expense and excluding income from INWIT and Cornerstone), and currently has an outstanding senior unsecured inter-company loan (due December 2021, with a further 12 months extension option) from Vodafone.The company's opening reported debt at the end of FY2021 is expected to be approximately EUR2.3 billion with a net leverage of around 4.0x EBITDAaL (after lease expense), which will equate to a Moody's-adjusted Gross Debt/EBITDA (excluding income from INWIT and Cornerstone) of around 5.0x. Moody's understands that the company has arranged third-party debt to be raised at the closing of the IPO to replace the outstanding inter-company borrowings it currently has with Vodafone.RATINGS RATIONALEThe Baa3 issuer rating of Vantage Towers reflects (1) its strong market position as a large and a geographically well-diversified tower company in Europe with high barriers to entry for competitors and high barriers to exit for customers; (2) good earnings and cash flow predictability, predominantly supported by anchor long-term service contracts with Vodafone; (3) the expectation of medium-term EBITDA growth driven by site additions, improving tenancies ratios and operational efficiencies; (4) good market valuation of the co-controlled stakes in Cornerstone (50%) and INWIT (33.2%), although both will continue to carry ring-fenced reported net debt leverage of around 3.0x-4.0x and up to 6.0x respectively; and (5) its well-defined ownership, independent management and governance structure with Vodafone committed to remaining its majority shareholder after the IPO.However, Vantage Towers' credit profile is constrained by (1) its high customer concentration with Vodafone, which will reduce only modestly over the medium term, (2) short history of operating as a separate entity with limited standalone historical audited financial information, (3) despite supportive cash dividends from INWIT and Cornerstone, Moody's expectation of negative free cash flow over the next two years, as a result of Vantage Towers' capital intensive model and planned dividend payments (of EUR280 million to be paid in FY2022), and (5) a starting net leverage of around 4.0x EBITDAaL (after leases) (company reported) with willingness to increase up to 5.5x for accommodating strategic organic and inorganic growth opportunities whilst continuing to target an investment grade rating.Vantage Towers has a portfolio of c.82,000 macro sites (including the sites in co-controlled Cornerstone and INWIT) and has leading market positions in 9 of its 10 European markets. The company generated revenues of EUR945 million in FY2020PF (excluding equity-accounted Cornerstone and INWIT that together generated around EUR1 billion of revenues on a pro forma basis). 49% of its reported revenues in FY2020PF were from Germany, 17% from Spain, 13% from Greece and 21% from other markets including Portugal, Czech Republic, Romania, Hungary and Ireland.Vodafone is the anchor tenant of Vantage Towers accounting for around 83% of macro sites revenues. Vantage Towers has secured Master Services Agreements (MSAs) with Vodafone in each of its markets. Each MSA has an initial non-cancellable term of 8 years, which will then extend for another three non-cancellable 8-year periods, unless, at the end of each term, Vodafone, with at least 12 months' prior notice, decides not to extend the terms of the MSA. Given the practical and prohibitive cost implications of switching to non-Vantage Towers infrastructure, Moody's believes it is highly likely the MSAs remain in force in the long-term.Vantage Towers has overlap with Cellnex in 5 out of 10 countries in which it operates. Spain is the only sizeable market where such overlap is meaningful where Vantage Towers is number 2 and Cellnex is number 3 in telecom macro sites, with similar sized operations. Moody's understands that in Spain Vantage Towers is contracted with active sharing number 2 and 3 telecom players, Vodafone and Orange, which creates high barriers to entry. INWIT and Cornerstone will also continue to remain the market leaders (by the number of macro sites) in Italy and the UK respectively, even after Cellnex's acquisition of CK Hutchison towers that got largely complete in January 2021.Over the medium term, Vantage Towers plans to achieve mid-single digit revenue growth (excluding pass through revenues) via focusing on increasing the tenancy ratio from 1.37x in FY2020PF to over 1.50x. As part of its plan the company will focus on increasing its number of tenancies from 62,100 in FY2020PF to over 77,600, excluding Cornerstone and INWIT. Moody's takes comfort from the fact that this planned increase in tenancies is well supported by 13,400 highly predictable tenancies including 7,100 of committed new sites and 4,000 tenancies on white spots. The company is aiming to generate reported EBITDAaL margin (after deducting operating lease expense and excluding pass through revenues) in the high fifties percentage compared to mid-fifties for FY2020PF.Moody's expects Vantage Towers to generate negative free cash flow (Moody's adjusted) over the next two years as a result of its high capex requirements and the 60% dividend payout of the company-defined 'recurring free cash flow (including dividends from associates)'. The company operates a capital intensive business model as it requires high expansionary capital spending in order to fulfil 7,100 contractual built-to-suit commitments that it is targeting over FY2022-FY2026. The company has budgeted a total capex for such new sites for EUR1 billion. In addition, as part of its strategy to optimize the cash lease payment, the company will incur ground lease buyout capital spending targeting 10% of its current portfolio. Moody's forecasts the company's total reported capex to range in EUR400 million-EUR450 million per annum in the next two to three years, representing 40% of its total revenue (of which maintenance capex is expected to be only c. 3% of revenue).Due to the high capital spending requirements, Vantage Towers will only see limited de-leveraging in the next 12-24 months, mainly driven by EBITDA growth. Moody's expects the company's gross leverage (Moody's adjusted) to range between 4.8x-5.0x over the next two years, assuming no meaningful debt-funded M&A transactions or exceptional shareholder returns.The company has said that it may lever up its balance sheet to 5.5x reported net leverage from the opening 4.0x in order to fund organic and inorganic growth. In Moody's opinion the likelihood of any large debt-financed acquisition appears low in the near-term as the company will be prioritizing sustained organic revenue growth via executing its planned growth capex investments. Nevertheless, Moody's would expect the company to take a disciplined approach to any M&A transaction in future such that it is able to maintain its credit metrics commensurate with a Baa3 rating.LIQUIDITYThe company's liquidity position is supported by an expected newly committed revolving credit facility (RCF) of EUR300 million (due 2024 with two one-year extensions; fully undrawn). At the end of FY2021, Moody's expects the company to have around EUR150 million in cash and cash equivalents. Cash on balance sheet, internally generated cash flows together with the availability under the RCF should be sufficient to fund its high capital spending requirements, dividends payout, and other operational needs in the next 12-18 months.ESG CONSIDERATIONSVantage Towers has low exposure to major environmental or social risks.The company has a limited record of operating as an independent entity. It has a well-defined financial policy and has outlined its willingness to increase leverage to 5.5x, representing EUR1 billion debt capacity on top of its net starting leverage of 4.0x to invest in organic or inorganic opportunities. The company has also communicated a clear commitment to maintaining an investment grade rating.Upon the completion of the prospective IPO, Vantage Towers will operate as an independent subsidiary with a two-tier board structure comprising four independent directors, including chair, and five Vodafone nominees. Vodafone aims to retain a majority stake in Vantage Towers post IPO and itself has an investment-grade credit profile and disciplined financial policy. Vantage Towers' operational relationship with Vodafone is clearly defined in the multiple MSAs with Vodafone.RATING OUTLOOKStable rating outlook reflects the predictability of Vantage Towers revenues and EBITDA which supports Moody's expectation of the company's performance to be largely in line with its business plan over (at least) the next few years.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGUpward rating pressure could develop over time if Vantage Towers (1) establishes a track record of operating as an independent company with continued growth in revenue and EBITDA, supported by improving tenancy ratios as well as an increasing share of revenues from customers other than Vodafone; and (2) conservatizes its financial policy leverage ceiling ratio from the current 5.5x (company reported net leverage) such that it can sustainably maintain Moody's adjusted gross leverage of around or below 4.75x.Downward rating pressure is likely if (1) the company significantly underperforms compared to its current business plan and medium term growth targets; (2) the credit quality of its key customer and majority owner, Vodafone, weakens sustainably; and (3) its Moody's adjusted gross leverage increases to over 6.0x on a sustained basis or its financial policy leverage ceiling ratio is revised to become more aggressive.PRINCIPAL METHODOLOGYThe principal methodology used in this rating was Communications Infrastructure Industry published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1076924. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEHeadquartered in Düsseldorf, Germany, Vantage Towers AG is a leading tower infrastructure company in Europe with around 45,500 fully controlled macro sites, and further 14,200 and 22,100 co-controlled macro sites in Cornerstone Telecommunications Infrastructure Limited (Cornerstone) and Infrastrutture Wireless Italiane S.p.A (INWIT), respectively. The company has wholly-owned tower infrastructure in eight markets including Germany, Spain, Greece (subject to planned execution of call option in conjunction with the IPO), Portugal, Czech Republic, Romania, Hungary and Ireland. Vantage Towers owns a 33.2% equity stake in INWIT in Italy, with co-control rights under the terms of a shareholder agreement with Telecom Italia S.p.A, and a 50% stake in Cornerstone in the United Kingdom, again with co-control right under the terms of the shareholder agreement.REGULATORY DISCLOSURESFor 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 rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is 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_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.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. Gunjan Dixit VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Peter Firth Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. 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