Concurrently, Moody's has also upgraded to B3 the ratings on the
and on the
Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect the rating agency's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the company's new term loan B2. The definitive rating may differ from the provisional rating.
"The rating upgrade to B3 reflects our expectation that eircom's operating conditions will improve, primarily as a result of better macroeconomic and competitive environments. In addition, the investments made by the company in its 4G and fibre networks, as well as the cost cutting efforts should strengthen eircom's business model, making it more sustainable over the long run," says
"While adjusted leverage remains high, the expected improvement in business conditions and the reduced refinancing risk resulting from the planned maturity extension of the senior facility, place eircom comfortably in the B3 rating category" adds
Moody's expects that operating conditions in
While competition remains intense, Moody's believes that the announced consolidation in the Irish mobile market should accelerate market repair.
The takeover of O2
eircom has made good progress in executing its business plan since the initial rating assignment in
eircom is also progressing well with its investment in next-generation fibre and the roll-out of the 4G mobile network, which together with the launch of quad-play offers, have enabled the group to strengthen its competitive positioning. The company is close to completing the cycle of heavy catch-up investments and next year, with reduced capex levels and no further voluntary leaver costs, it is expected to generate positive free cash flows.
One of Moody's concerns captured in eircom's previous Caa1 rating was the company's negative equity cushion, resulting from an enterprise value that was lower than its debt and that could potentially lead to a debt restructuring in the future. However, valuation multiples across the European telecoms sectors have increased over the past year and Moody's believes that eircom has built up some equity cushion, albeit small.
A negative consideration is that eircom's leverage remains high, with debt/EBITDA (Moody's-adjusted, including adjustments for operating leases and pension deficits) of around 6.0x-6.5x expected for FY
However, the high adjusted leverage is partly driven by the large and volatile pension deficit, which has increased over the past few years as a result of the historical low discount rates. The high debt load leads to large interest payments, which slows the company's capacity to internally generate funds to reduce debt.
In addition, Moody's notes that revenue growth may prove elusive and therefore, eircom will have to rely on its continued ability to control costs to show EBITDA growth.
The upgrade to B3 rating also reflects eircom's adequate liquidity profile, supported by a cash balance of
The B3 CFR reflects (1) eircom's high leverage and slow deleveraging profile; (2) the challenging operating environment where eircom operates, which has weakened the company's operating performance over the past few years; (3) the company's past history of default and restructuring; and
(4) eircom's improving, but still small, equity cushion.
More positively, the rating also reflects (1) eircom's strong position in the fixed-line market as
(3) Moody's expectation of positive free cash flow generation once eircom completes the current investment cycle; and (4) its adequate liquidity profile.
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