July 11 (SeeNews) - Moody's Investors Service said on Tuesday it has affirmed its B2 corporate family rating (CFR) of Adria Midco, a holding company set up by private equity fund KKR for the acquisition of cable assets operating on the markets of ex-Yugoslavia.
The rating agency's has, however, changed the outlook on the ratings of Adria and its wholly owned subsidiary United Group B.V. to negative from stable, it said in a statement.
Concurrently, Moody's has assigned a B2 rating to the proposed 1.35 billion euro worth of senior secured notes (due 2022-24, consisting of fixed and floating rate tranches) to be issued by United Group B.V. The B2 rating on the company's existing 775 million euro senior secured notes due 2020 remains unchanged and will be withdrawn upon repayment of these instruments.
Moody's has also downgraded Adria's probability of default rating (PDR) to B2-PD from B1-PD.
The ratings agency also said:
"The rating action follows the announcement that Adria has agreed to acquire Central European Media Enterprises Ltd.'s television businesses in Slovenia and Croatia for a total consideration of EUR230 million. The proceeds from the EUR1.35 billion new notes will be used (1) to fund EUR200 of the acquisition price (rest will be funded via cash and drawings under the revolving credit facility); (2) repay the EUR229.2 million PIK loan (including accrued interest) at Adria TopCo B.V. (holding company outside Adria Midco's restricted group); (3) refinance the existing EUR775 million senior secured notes and repay drawings under the existing revolving credit facility (which will be terminated and replaced with a new facility); and (4) pay the redemption premium, accrued interest and transaction costs estimated at around EUR60 million.
"The change in outlook to negative reflects the material increase in leverage at Adria level owing to this refinancing and M&A transaction. As a result, the company has limited headroom for deviation against its business plan over the next 12-18 months," says Gunjan Dixit, a Moody's Vice President -- Senior Credit Officer and lead analyst for Adria. Moody's estimates that the company's Gross Debt/ EBITDA will increase to 6.8x from around 5.0x pre-transaction.
"This high leverage is to an extent balanced by the company's solid operating momentum, track record of revenue and EBITDA growth, and improved scale and scope of operations over the past few years," adds Ms. Dixit.
RATINGS RATIONALE
The refinancing of the holding company PIK loan from within the Adria restricted group together with the debt-funded acquisitions, will result in a meaningful increase in Adria's leverage to 6.8x (Moody's adjusted - based on last two quarters annualized EBITDA -- on a pro-forma basis) compared to around 5.0x, before incorporating the transactions. The rating agency expects the company to rapidly de-lever towards Moody's adjusted Gross Debt/ EBITDA of 5.5x in the next 12-18 months helped by continued strong organic growth in the business, lower exceptional costs and the contribution from the CME acquired assets.
Moody's views the acquisition of the CME assets as a good strategic fit, which give the company the ownership of market leading channels in two of its existing markets. Moody's recognizes that there is good EBITDA upside in the Slovenian asset, as its flagship free-to-air channel POP TV has recently been converted into a pay channel paving the way for increased future carriage revenues locked in with already signed long-term contracts with pay TV operators. The acquisitions give Adria the opportunity to leverage on CME's strong production capabilities for local content (particularly in Croatia) that can be used across Adria's production platforms. The acquisition will also contribute some operational and revenue synergies. However, the acquisition is fully priced . In addition, the acquired businesses will increase Adria's exposure to the cyclical TV advertising market. Advertising related revenues will account for around 15% of Adria's total revenues, following the acquisitions.
The B2 CFR further reflects (1) the company's well established market position in all its core countries of operation and good brand recognition; (2) considerable improvement in the scale of revenues and EBITDA as well as service offering diversification achieved over the past few years organically as well as via acquisitions; (3) the integration of Tusmobil has strengthened its product offering in Slovenia, its largest market as a network operator and quad-play provider; (4) good potential for cross-selling products in relatively recently liberalized markets; (5) its established pan-region programming position with significant elements of exclusivity; and (6) the company's technologically advanced DOCSIS 3.0 cable infrastructure with limited network overbuild.
The B2 rating also acknowledges (1) Adria's geographical concentration within the ex-Yugoslav region - mainly in Serbia (Ba3 Stable), Slovenia (Baa3 Positive), and Bosnia and Herzegovina (B3 Stable); (2) the absence of material free cash flow (FCF) generation before 2017; (3) the company's ongoing acquisition activity and (4) foreign exchange risk primarily associated with company's exposure to Serbian dinar (RSD) and with its debt and interest payments being EUR- denominated and unhedged.
Moody's considers Adria Midco's liquidity position to be adequate for its near-term operational needs. At transaction closing, the company will have cash and cash equivalents of around EUR25.9 million and access to a new super senior RCF of at least EUR100 million and local bilateral lines of EUR60 million and EUR20 million. The company will not have any material scheduled refinancing needs until 2022 when the RCF and fixed rate notes mature. The RCF is restricted by a leverage-based maintenance covenant (of 9.5x Net Debt to Consolidated EBITDA) tested on an annual basis.
DOWNGRADE OF PDR TO B2-PD FROM B1-PD
The change in PDR to B2-PD from B1-PD reflects the use of a 50% family recovery rate assumption, instead of the previous 35%, reflecting a capital structure comprised of both bank debt and bonds.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook reflects the increase in the company's debt load which weakens its key leverage and cash flow coverage metrics outside expected ranges for the current rating over the next 12 months. Although we expect the company to de-lever rapidly over that period, including the earnings contributed from the target assets, any material negative deviation in actual performance compared to the company's business plan could reduce the de-leveraging potential and put negative pressure on the ratings.
WHAT COULD CHANGE THE RATING UP / DOWN
Downward rating pressure could develop if leverage is not managed so that a Gross Debt/EBITDA ratio (Moody's definition) at or below 5.5x is maintained on a sustained basis.
Conversely, upward rating pressure could develop if the company reduces its leverage so that its Gross Debt/EBITDA ratio (Moody's definition) falls well below 4.5x and demonstrates its capacity to generate FCF/debt of above 5%, both on a sustainable basis.
Adria Midco B.V provides through its subsidiary United Group B.V. cable (CATV) and satellite (Direct-to-Home or DTH) pay-TV, broadband and telephony in Slovenia, Serbia and Bosnia and Herzegovina, mobile services in Slovenia, satellite pay-TV across the six countries of former Yugoslavia, Slovenia, Serbia, Bosnia and Herzegovina, Croatia, Macedonia and Montenegro and OTT services worldwide."