June 30 (SeeNews) - Global credit agency Standard and Poor's said it has placed the 'B+' long-term corporate credit rating of Bulgarian Telecommunications Company (BTC) on watch with developing implications due to risk of material liquidity and refinancing risk.
"We expect Bulgarian Telecommunications (Vivacom) will refinance its 400 million euro ($455.7 million) senior secured notes due in November 2018, one year in advance, and its parent's short-term debt may be extended thereby removing near-term refinancing risk," the credit rating agency said late on Thursday.
S&P said it expects that BTC will generate stable earnings before interest tax depreciation and amortisation (EBITDA) and moderately positive cash flow after capital expenditure.
"We expect to resolve the CreditWatch before the end of 2017. If the group's refinancing is successful and the parent faces no liquidity risk, we will likely raise the rating. If the refinancing is not completed or we see signs that the situation at the parent company could squeeze Vivacom's liquidity, we could lower the rating," S&P added.
S&P also said in the statement:
"We also placed our 'B+' issue rating on Vivacom's senior secured notes on CreditWatch with developing implications. Our CreditWatch placement reflects the refinancing risk linked to upcoming debt maturities in 2018.
We understand that Vivacom is working on refinancing its €400 million senior secured notes. After the refinancing, the remaining term of Vivacom's debt could be materially extended; as of March 31, 2017, Vivacom reported total debt of Bulgarian lev (BGN) 802.9 million (around €400 million). That said, if the refinancing does not go ahead before the end of this year, we could revise our liquidity assessment according to our criteria and lower the ratings.
We continue to see Vivacom as an insulated group entity, which allows for a two-notch difference between its stand-alone credit profile and the group credit profile. Our assessment is supported by several key restrictions in the notes' indenture, including, but not limited to:
- No cross default between Vivacom's €400 million senior secured notes and the parent company's debt;
- Restrictions on payments from Vivacom to the parent company;and
- Vivacom's operations as a separate entity from its parent, with separate funds, books, and liabilities; we view Vivacom as a severable entity.
In addition, we view it as very unlikely that all of Vivacom's assets and liabilities would be consolidated into those of the parent company in a hypothetical scenario of the parent declaring bankruptcy. Moreover, we consider that the current shareholders have no economic incentive to draw the subsidiary into any bankruptcy proceedings, since the noteholders have a first-lien charge over Vivacom's shares. We also consider that there is an independent director with effective influence on decision-making.
The previous delay in refinancing the parent company's €150 million equity bridge loan did not affect Vivacom's performance. We expect that the new financing Vivacom expects to put in place will have the same senior status and similar cash upstreaming restrictions as the current notes.
Our assessment of Vivacom's business risk is constrained by the group's exposure to a single country, Bulgaria, and by its relatively smaller size than industry peers. Furthermore, Vivacom has significant exposure in the fixed-voice segment (15% of revenues in first-quarter 2017), which is under pressure due to fixed-to-mobile substitution. In addition, Vivacom's EBITDA margin remains subdued by competitive pressure from the other two large telecom operators in the Bulgarian market, which are the subsidiaries of global players Telekom Austria and Telenor.
These weaknesses are partly offset by Vivacom's solid market position as the largest telecom operator in Bulgaria by total revenues. In the three-player Bulgarian mobile market, Vivacom remains the No.3 player after MTel (Telekom Austria) and Telenor Bulgaria, with a 29% market share (by number of subscribers) in first-quarter 2017 compared with 28.8% a year ago, and a 28.0% market share in terms of revenues (up by 0.1 basis points year on year). Revenues from mobile remain the key contributor to Vivacom's revenues, accounting for 57% (flat year on year).
We also consider that Vivacom holds a leading 82% market share in fixed voice and is the No. 1 provider in fixed-line broadband Internet, with a 26% market share. Revenues from the fixed segment comprised 41% of the total in first-quarter 2017, compared with 40% a year before. Vivacom's market position is further supported by its vast and good quality mobile GSM/MTS network covering close to 100% of the country's territory, and LTE coverage of 94% of the country's population. We also factor in Vivacom's multiproduct offers, including land-line telephony, broadband Internet, pay-TV, and mobile telephony.
We continue to rate Vivacom's senior secured notes at the same level as the corporate credit rating. This is because the share of priority liabilities is very low. We also take into account that all debt at the parent company is subordinated to the senior secured notes.
The developing implications of the CreditWatch indicate that we could lower or raise the ratings depending on the success of the group's debt refinancing. We expect to resolve the CreditWatch by the end of 2017.
If the group successfully refinances its €400 million notes and the parent also refinances its debt, we will likely raise our ratings on Vivacom by one or two notches. For an upgrade, we would assume no liquidity pressure either at Vivacom or the parent.
However, if the refinancing does not go ahead and we see signs that any proceedings at the holding company will likely impinge on Vivacom's liquidity, we could lower the ratings."
($ =0.8776 euro)