May 9 (SeeNews) - Moody's Investors Service said it has affirmed its B2 ratings and negative outlook on Adria Midco, a holding company set up by private equity fund KKR for the acquisition of cable assets operating on the markets of the former Yugoslavia.
The rating agency has affirmed the B2 corporate family (CFR) and the B2-PD probability of default rating (PDR) of Adria Midco, as well as the ratings of its wholly owned subsidiary, telecommunications and media services provider United Group B.V., it said in a statement.
Moody's has affirmed a B2 rating to the existing 900 million euro worth of senior secured notes (due 2022-24, split into two tranches), and has assigned a B2 rating to the proposed 550 million euro senior secured notes, due 2025, to be issued by United Group B.V. The B2 rating on the company's existing 450 million euro senior secured notes due 2023 remains unchanged and will be withdrawn upon repayment of these instruments.
The ratings agency also said:
"Proceeds from this debt issuance will be used to redeem the EUR450 million existing senior notes due in 2023. Concurrently, UG will use part of the proceeds to repay drawdowns under its EUR100 million super senior RCF ("SSRCF")."
"In March 2019 , funds advised by BC Partners acquired a majority stake in UG from KKR. To finance part of the transaction, BCP entered into a Pay-If-You-Can (PIK) bridge facility agreement for EUR306 million at the holding company, Summer Bidco B.V., outside of the restricted group defined by the lenders for Adria. BCP intends to issue EUR306 million of PIK Notes to refinance the bridge facility."
"The ratings affirmation reflects the (i) strong operational performance of the company; (ii) considerable improvement in the scale of revenues and EBITDA; (iii) positive track record of integrating acquired companies and; (iv) largely leverage neutral nature of the Senior Secured Notes refinancing and the PIK issuance for Adria's restricted group", says Agustin Alberti, a Moody's Vice President -- Senior Analyst and lead analyst for Adria.
"The negative outlook continues to reflect the (i) high leverage ratio for the rating category, which has however improved since 2017, and (ii) currently constrained free cash flow generation, that leaves limited headroom for underperformance", adds Mr. Alberti.
RATINGS RATIONALE
The operating performance of Adria remains robust. The company grew its reported revenues and company-adjusted EBITDA organically by 10% and 12% year-on-year in 2018. Over the last five years, the company has grown its scale of revenues and EBITDA by a solid 21% and 19% cumulative average growth rate respectively on a reported basis, helped by strong organic growth as well as a large number of M&A transactions. In July 2018, the company completed the acquisition of CME Croatia, including the Nova TV flagship channel which is the most watched channel in Croatia. In September 2018, it also acquired Direct Media, a leading media buying agency in Serbia and its terrestrial TV stations Pink BiH and Pink Montenegro. These recent acquisitions will enhance the scale of the company's media business, which accounts for 32% of overall revenues on a pro-forma basis as of year-end 2018. On 18 January 2019, the company announced that its agreement to purchase certain broadcasting assets located in Slovenia from CME was terminated.
Supported by strong EBITDA growth, Moody's expects the company to de-lever to gross Debt/EBITDA of 5.7x in 2019 and 5.3x in 2020 (from 6.1x in 2018), after concluding the acquisitions of CME Croatia and Direct Media/ Pink in 2018 for a total consideration of EUR193 million. This deleveraging scenario factors in our expectation that the company will up-stream cash to service the PIK notes (around EUR20 million per annum from 2020 onwards), although Moody's also believes that metrics will depend on the company's growth strategy, which to date has been highly acquisitive.
Under the existing documentation of the EUR1.35 billion Senior Secured Notes, the PIK issued outside UG can potentially be refinanced with UG incremental debt only if: (1) such debt complies with the incurrence covenants (including the 5.0x consolidated leverage ratio incurrence test, apart from certain permitted debt baskets within the credit facilities) and; (2) such payments (including any principal repayments) are allowed under the restricted payment test. While the PIK notes will be excluded from our metrics for the Adria restricted group, Moody's believes that they signal a somewhat more aggressive financial policy.
At transaction closing, the company will have cash and cash equivalents of around EUR43 million. Moody's assessment of adequate liquidity factors in the company's intention to increase its SSRCF due 2022 to EUR200 million, of which EUR24 million will be drawn, from EUR100 million currently, while concurrently reducing its local bilateral lines to EUR40 million from EUR100 million. The company will not have any material maturities until 2022 when the SSRCF and fixed rate notes mature. The SSRCF contains one leverage-based maintenance covenant of 9.5x Net Debt to Consolidated EBITDA tested on an quarterly basis.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook reflects Moody's view that in spite of some deleveraging in the past year, the company's key leverage and cash flow metrics are expected to remain weak for the current rating for the next 12 months with limited room for underperformance or material debt-financed acquisitions.
WHAT COULD CHANGE THE RATING UP / DOWN
Downward rating pressure could develop if leverage is not managed so that its gross Debt/EBITDA ratio (Moody's definition) is maintained below 5.5x on a sustained basis. Downward rating pressure could also arise if the company's liquidity profile deteriorates.
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 adjusted FCF/debt (Moody's definition) of above 5%, both on a sustainable basis. However, the PIK instrument outside of the restricted group represents an overhang for Adria, as it could be refinanced within the restricted group once sufficient financial flexibility develops. Therefore, we believe that the PIK instrument could be a constraint to upward rating pressure in the future."