Fitch Downgrades France's SFR Debt Ratings; Stable Outlook

Fitch Ratings has downgraded France-based Societe Francaise du Radiotelephone's (SFR) Long-term Issuer Default ratings (IDR) and senior unsecured rating to 'BBB+' from 'A-'. The Outlook is Stable. The Short-term IDR is affirmed at 'F2'.

The downgrade reflects Fitch's substantially lower expectations of performance from the Neuf Cegetel (Neuf) business than had been factored into the agency's forecasts when the acquisition closed in April 2008. This both increases the group's operational risk profile and lengthens its de-leveraging timetable, the adherence to which had been a key consideration of the 'A-' rating.

Fitch expects SFR's solid business model will remain largely underwritten by its overall stable and cash-generative mobile activities (84% of group EBITDA), with ongoing competitive and regulatory pressures (mobile termination rates and new taxes) mitigated by increasing data revenues and lower capex requirements.

However, SFR's management is expecting deterioration in the fixed line segment's profitability in 2009. This is because of technical and commercial integration issues, the impact of the Chatel law, new telecom taxes and structural reduction of switched voice revenues in an increasingly competitive French broadband market. These factors, alongside continued needs to invest in the network and the impact of the recession, have led Fitch to revise downwards its medium-term earnings forecasts for fixed-line, with a greater potential for volatility in earnings.

Fitch considers SFR to be comfortably placed in the 'BBB+' rating with its current credit metrics and business risk profile, which factors in the possibility of underperformance in the fixed segment. The most likely potential triggers for negative rating action would be business-related, with either worse performance in fixed-line than expected, a downturn in results in the mobile segment due to the maturing French market, though a change in dividend policy which marks a divergence from SFR's historically conservative financial policy could also pressure the rating. Conversely, a restoration of pre-Neuf acquisition credit metrics, for example, to an unadjusted net debt/EBITDA below 1x, combined with a sustainable strengthening of the fixed line business, could lead to positive rating action.

Fitch anticipates no major changes to the French mobile market. While competitive pressures will remain among the three existing mobile operators, the ongoing debate with regards to conditions of the fourth 3G mobile licence award suggest that the new entrant is unlikely to be commercially operational before 2011/2012, at which point the mobile market would have probably reached full penetration.

The current level of broadband penetration (approximately 66% at Q109) and consumers' evident appetite for fixed multiple-play services suggest room for further growth in this market. Fitch notes that France Telecom's strategy to push content through triple-play products could come as a threat to the other competitors once the market reaches saturation with product differentiation being the only element left to generate organic growth.

For FY08, group revenues increased 1.2% to EUR11.6bn on comparable basis, driven by a 1.7% growth in mobile revenues while fixed line activity saw a 0.7% decline in sales. On pro-forma basis (assuming consolidation of Neuf Cegetel from 1 January 2008), group unadjusted net debt/EBITDA stood at 1.7x (1.8x on a reported basis), in line with Fitch's expectation. Reported group funds from operations /sales declined to 25.1% in FY08 from 27.7%, reflecting the dilutive effect of the lower cash generative fixed line segment acquired.

Posted to the site on 8th June 2009