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Moody's upgrades eircom's rating to B3

February 11, 2014



Moody's Investors Service has today upgraded the CFR of eircom Holdings (Ireland) Limited (eircom) to B3 from Caa1 and its probability of default rating (PDR) to B3-PD from Caa1-PD.

Concurrently, Moody's has also upgraded to B3 the ratings on the EUR2.3 billion senior secured credit facility raised by eircom Finco S.a.r.l.

and on the EUR350 million senior secured notes due 2020 issued by eircom Finance Limited. Moody's has also assigned a provisional (P)B3 rating to Term Loan B2, a new tranche of the existing term loan facility. The outlook on all ratings is stable.

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.

RATINGS RATIONALE

"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 Ivan Palacios, a Moody's Vice President -- Senior Credit Officer and lead analyst for eircom.

"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 Mr Palacios.

Moody's expects that operating conditions in Ireland will improve, partly driven by a more benign macroeconomic environment, as reflected by Moody's upgrade of Ireland's sovereign rating to Baa3 (positive) from Ba1 on 17 January 2014. The reduction in the unemployment rate, the strong expansion of exports, early signs of revival in domestic demand and strong foreign direct investment are all expected to contribute to improved GDP growth prospects, which should benefit eircom's top line in light of the strong correlation between GDP and telecom revenues.

While competition remains intense, Moody's believes that the announced consolidation in the Irish mobile market should accelerate market repair.

The takeover of O2 Ireland by Hutchison, which was agreed in June 2013 but is still pending regulatory approval, would combine two of the four mobile networks in Ireland. However, it is uncertain at this stage how this merger could potentially affect eircom's network sharing agreement with O2 Ireland.

eircom has made good progress in executing its business plan since the initial rating assignment in June 2012, and therefore execution risk, which was one of Moody's main concerns at that time, has diminished. The group's operating performance has been in line with its business plan, particularly with regard to EBITDA generation, which is stabilising at around EUR120 million per quarter. In addition, eircom will complete by December 2014 its announced headcount reduction plan affecting 2,000 full-time employees, which will generate EUR100 million in cost savings per year and mitigates the higher-than-initially-anticipated pressure on revenues.

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 June 2014.

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 EUR246 million, the expected positive free cash flow generation next year, adequate headroom under covenants and an extended debt maturity profile subject to the successful completion of the amend and extend process by which the existing term loan facility will be extended to 2019 from 2017. This amend and extend process will give eircom more time to reduce debt and more flexibility to accommodate potential changes in the ownership structure of the company.

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 Ireland's incumbent operator, with a 52% market share, and its position as the third-largest operator in the mobile segment, with a market share of 21% as of September 2013, both as reported by Comreg; (2) the potential for its competitive position to be strengthened over time as a result of its accelerated investment plan;

(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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Source: EMBIN (Emerging Markets Business Information News)


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