March 27 (SeeNews) - S&P Global Ratings said on Friday that it has downgraded its long-term issue credit rating on Bulgarian Telecommunications Company (BTC), which operates under the Vivacom brand, to 'B+' from 'BB-' and left the rating on watch negative.
The rating action was dictated by the fact that BTC's parent company - Luxembourg-registered Viva Telecom, is taking longer to carry out the planned maturity extension of its debt than S&P Global Rating anticipated, the ratings agency said in a statement.
S&P Global Ratings also said in its statement:
"Shorter debt maturity at the parent level are constraining the group credit profile (GCP) and the rating. The downgrade reflects that the planned maturity extension of the debt at the holding company is taking longer than we previously anticipated. We understand that the parent company is working on a maturity extension until the transaction with United Group closes. As a consequence, we now see the group's liquidity as weak, which constrains the GCP at 'b-'. The GCP factors in the shorter debt maturity at the parent level and a track record of late refinancing and debt maturity extensions at the parent level, but also higher level of debt than at the operating subsidiary.
We continue to see Vivacom as an insulated entity of the group, allowing for a two-notch difference between the 'B+' issuer credit rating and the 'b-' GCP (see "Bulgarian Telecommunications Company EAD," published Aug. 30, 2019).
The ratings are still on CreditWatch negative following the announcement of the acquisition. We placed the rating on Vivacom on CreditWatch negative when United Group (B/Stable/--) announced its intention to acquire the company (see "Bulgarian Telecom Operator Vivacom 'BB-' Ratings Put On Watch Negative On Planned Acquisition By United Group," published Nov. 19, 2019). The transaction has not closed yet and regulatory approval by the EU is still pending. We are therefore leaving the ratings on CreditWatch with negative implications until the transaction closes (expected during the second quarter of 2020). We expect Vivacom's credit quality will weaken after the transaction is complete because it will be owned by a lower-rated company with higher leverage. Finally, the negative CreditWatch also factors in potential additional delays in extending the debt maturity at the holding company, independently from the transaction with United Group.
We continue to assess Vivacom's stand-alone credit profile as 'bb', reflecting our view that its business position and cash flow generation remain unchanged. We anticipate growing mobile average revenue per user on higher voice and data consumption, continued uptake in fixed broadband and pay-TV subscribers, as well as cost efficiency and contained capital expenditures will continue to support sound cash flow conversion of about 25% of reported EBITDA (including lease expenses), and adequate liquidity at the operating subsidiary level. We expect it will translate into free operating cash flow to debt of 10%-15% and S&P Global Ratings-adjusted debt to EBITDA heading toward 2.0x.
We plan to resolve the CreditWatch after the transaction closes, which is expected in second-quarter 2020. We expect to lower the rating on Vivacom to that on United Group at closing. This will depend on the final capital structure at both United Group and Vivacom, our assessment of Vivacom's strategic importance to United Group, and the new owner's financial policy. We could also lower the rating if the debt maturity at Vivacom's parent company, Viva Telecom (Luxembourg) S.A., is not extended on time, independently from the transaction with United Group."