CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned Cable & Wireless Communications Limited (CWC) Long-Term Foreign Currency and Local Currency Issuer Default Ratings (IDR) of 'BB-' with a Stable Outlook. A list of full rating action follows at the end of this release.
KEY RATING DRIVERS
CWC's ratings reflect its diversified services and operating geographies, leading market positions, and solid network competitiveness backed by high investment level. CWC's market positions were further strengthened by its acquisition of Columbus International Inc. (Columbus) in 2015. The ratings are tempered by CWC's high leverage for the rating level, cash flow leakage to non-controlling shareholders for some of its key operations, and pressured growth in its main mobile and fixed-voice segments due to the mature industry trend.
CWC is a wholly owned subsidiary of Liberty Global plc (LG), and is a part of LiLAC Group (LiLAC), which represents LG's Latin America and Caribbean operations. The company benefits from the strategic oversight by LG and its management expertise, as well as procurement and operating synergies gained from the group. LiLAC operating entities are separately capitalized and operations are managed independently; the LG group maintains a leverage target of 4.0x-5.0x for companies in the group. In Fitch's base case scenario for the short to medium term, Fitch does not foresee any material cash flow upstream to the parent given CWC's high leverage and suppressed free cash flow (FCF) generation that limits capacity for such cash flow upstream.
Solid Market Position:
CWC is an integrated telecom operator with operational geographies in the Caribbean region, Latin America, and the Seychelles. The company's operation is well diversified into mobile and fixed services and it has the number one market position in the majority of its markets, especially for the fixed-line segment following its acquisition of Columbus, which resulted in improved scale and network reach and quality.
The market structure in most of the region is largely a duopoly between CWC and Digicel. Fitch does not believe the risk of a new entrant to be high given the relatively small size of each market amid the increasing market maturity, especially for the mobile service. Under this environment, Fitch expects the company's leading market positions to remain stable over the medium term although the competitive pressures should remain high. In addition, the company's continued high investment for network upgrades, under its three-year 'Project Marlin' capex plan, should bode well for its network competitiveness in the coming years.
Slow Growth; Stable Margins:
CWC's revenue growth has been stagnant during 2016 as most segments are pressured by a high level of competition and the unfavourable industry trend. During the first six months of fiscal year 2017 (FY17), which ends on March 31, 2017, the company's revenues contracted by 2.2%, mainly due to the suppressed mobile and fixed-voice segments. Fitch does not expect revenue contraction in the mobile segment to reverse in the short term as data ARPU improvement would not be sufficient to fully mitigate the mobile voice ARPU trends. Legacy fixed-voice revenue erosion is also unlikely to abate due to waning demand given cheap mobile voice or Voice-over-internet-protocol (VoIP) services. Fitch believes that CWC's broadband and managed services segments will be the main growth drivers backed by its increasing subscriber base and relatively low service penetrations, and growing corporate/government clients' IT service demands. Overall, Fitch forecasts these two segments will enable resumed modest revenue growth in FY18.
Despite revenue contraction, the company has managed to improve its EBITDA generation by 1.5% during 1HFY17 compared to a year ago, mainly backed by cost savings from network and staff related synergies following the Columbus acquisition. Following the acquisition by LG in May 2016, the company also announced its plan to save additional USD150 million by 2020 on a recurring basis; half is through opex reduction and the remainder is capex savings. These acquisition-synergy-driven cost reductions should help the company maintain relatively stable EBITDA margins over the medium term at 37%-38%.
Negative FCF Until FY17:
Fitch expects CWC's FCF generation to remain negative in FY17 due to high capex, which has remained in negative territory since FY14. The company also paid special dividend of USD194 million related to LG's acquisition of CWC during FY17, which was funded by its Term Loan B2 at Sable International Finance Limited (SIFL). Despite continued EBITDA improvement to USD950 million in FY16 (USD902 million on a restated basis under US GAAP following LG's acquisition), the company's CFFO generation was weak, just USD138 million, mainly due to increased working capital and high cash finance expenses. Capex remained high at USD528 million during FY16, accounting for 22% of total sales, and the company also paid dividends of USD116 million, resulting in negative FCF generation of USD506 million and negative 21% of FCF margin, in line with the FY15 level of negative 22%.
Positively, in the absence of any dividends and reduced capex following the completion of the project Marlin, Fitch expects CWC's FCF generation to turn modestly positive from FY18, which should lead to modest medium-term deleveraging.
CWC's leverage is high for the rating level. The company's adjusted net debt to EBITDAR leverage has increased to 3.6x at end-FY16 from just 2.0x in FY14 mainly due to its Columbus acquisition in 2015 and continued negative FCF generation. Given the aforementioned negative FCF projection for FY17, Fitch estimates the company's adjusted-net-debt-to-EBITDAR leverage to increase to 4.4x by end-FY17 and modestly improve to 4.2x over the medium. Also, the company's cash-flow-based leverage was weaker than EBITDAR-based metrics as its FFO-adjusted net leverage was 5.2x at end-FY16.
Different Recovery Prospects:
The IDR of CWC is based on the consolidated credit profile of the group, including Columbus, given the high degree of operational integration and common business and financial strategy. For issuance ratings, Fitch believes the creditors of SIFL debt, including revolving credit facility and term loan, as well as senior unsecured notes, enjoy structurally senior guarantees from key intermediate and ultimate holding companies of the group, compared to the unsecured notes at Cable & Wireless International Finance B.V. (CWIF), which is only guaranteed by Cable & Wireless Limited (CWL).
Based on Fitch's recovery analysis, debts at SIFL are assigned RR4 recovery ratings, which represent an average recovery prospect in the case of default, resulting in the same issuance ratings as the group IDR of 'BB-'. Based on the waterfall approach, Fitch does not expect there to be meaningful residual value left for the unsecured notes at CWIF after covering senior claims at SIFL, resulting in a RR5 recovery rating and a 'B+' issuance rating, which is a notch lower than the IDR.
Recovery rating on Columbus' senior unsecured notes should be based on its own asset pool and cash flow generation given the separate guarantor group structure from SIFL guarantor group. As such, Fitch has assessed Columbus' notes recovery prospects on a stand-alone basis, and assigned 'RR4' recovery rating, resulting in the same issuance rating as the group IDR of 'BB-'.
CWC's leading market position, diversified operations, and relatively stable EBITDA generation compare in line or favourably against other regional telecom operators in the 'BB' rating category. This strength is offset to a degree by its higher leverage than most peers in the same rating category and continued short-term negative FCF generation. Also, LG's group financial policy is a constraint on CWC's ratings. The company's overall financial profile is stronger than its direct regional competitor, Digicel Group Limited, which is rated 'B'. No country ceiling, parent-subsidiary linkage, or operating environment aspects impact the ratings.
Fitch's key assumptions within the rating case for CWC include
--Negative revenue growth in FY17, followed by low-single-digits revenue growth from FY18 and beyond;
--EBITDA margin to continue to improve close to 38% by FY18, mainly due to operational synergies from LG's acquisition;
--Capital intensity to gradually fall toward 16% by FY19;
--No shareholder distribution in terms of dividends, or intercompany loans;
--Adjusted net debt to EBITDAR to remain in the range of 4.0x-4.5x over the medium term.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
--Muted revenue growth and margin erosion due to intense competition and lower-than-expected synergy benefits from the acquisition by LG, and continued high capex and working capital burden resulting in sustained negative FCF generation;
--A high level of cash flow upstream to LG;
--Sustained deterioration in its adjusted net leverage, increasing toward 5.0x from the current projection range of 4.0x - 4.5x.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
--Continued margin expansion and FCF generation turnaround;
--Clear commitment for deleveraging in the absence of any material cash flow upstream to LG, resulting in its adjusted net leverage falling well below 4.0x on a sustained basis;
--Improvement of its FFO-based net leverage, more closely aligned with the EBITDAR based leverage ratios.
CWC's liquidity profile is sound, backed by its long dated debt maturities profile and stable operational cash flow generation. The company held USD231 million of readily-available cash as of Sept. 30, 2016, while its debt maturities until the end-2017 was USD142 million. CWC also has a USD625 million revolving credit facility at SIFL, which increased from USD570 million during October 2016, with USD220 million of unused availability to be drawn. The company also has credit facilities at its regional operating subsidiaries, mainly Panama, totalling USD368 million, of which USD286 million was drawn and USD82 million was undrawn as of Sept. 30, 2016. These facilities further bolster CWC's financial flexibility. The company has good access to international capital market.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings,
Cable & Wireless Communications Limited
--Long-Term Foreign Currency and Local Currency IDRs 'BB-'/ Outlook Stable.
Cable and Wireless International Finance B.V.
--Senior unsecured notes 'B+/RR5'.
Sable International Finance Limited
--Senior secured revolving credit facility and term loans 'BB-/RR4';
--Senior unsecured notes 'BB-/RR4'.
Columbus International Inc.
--Senior unsecured notes 'BB-/RR4'.
Additional information is available on www.fitchratings.com.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
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