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Fitch Removes Negative Outlook for Lithuania's Bite Network

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Note -- this news article is more than a year old.

Fitch Ratings has affirmed Lithuania based mobile network operator UAB Bite Lietuva's (Bite) Long term Issuer Default Rating (IDR) at 'CCC' and removed the Negative Outlook. Bite's latest results have shown some resilience in Lithuanian EBITDA despite continued revenue declines and this, together with continued growth in Latvia, has contributed to stronger consolidated EBITDA figures and improvements in free cashflow (FCF) generation.

"Fitch believes that the risk of a further liquidity crisis has receded enough to enable removal of the Negative Outlook," said Michelle De Angelis, Senior Director in Fitch's Leveraged Finance team. "However the 'CCC' IDR reflects Bite's challenging operating environment and the execution risk still inherent in generating consistent positive FCF to meet contractual debt reduction obligations from 2011."

Lithuanian revenues continue to decline as a result of both economic conditions and regulatory pressures. The challenge for Bite will be to arrest and reverse this trend as the Lithuanian economy recovers over the next 1-3 years. Nevertheless, Lithuanian EBITDA on a trailing 12-month (LTM) basis has stabilised for the last three quarters at around EUR45m, helped by lower interconnection and roaming costs as a result of regulatory changes. However, unless the revenue decline can be halted, Lithuanian EBITDA could yet come under pressure. In contrast, the Latvian business continues to grow and negative EBITDA narrowed to EUR7m on an LTM basis at end-Q110 compared to an EBITDA loss of EUR14.3m at end-Q109. As a result consolidated LTM EBITDA increased in Q110 to EUR36m - the highest level seen over the last three years - and net debt/ consolidated EBITDA reached 6x (versus 6.6x at YE09).

Nonetheless, Bite's operations in Lithuania continue to face the pressures of a highly penetrated and competitive market, and although the Latvian operations have had some success, there remains a risk of a more aggressive response from better-capitalised competitors, which could slow progress towards positive EBITDA territory. Positive rating momentum could be generated from consistent improvements in consolidated EBITDA, positive EBITDA in Latvia and, most importantly, consistent positive FCF generation.

Interest cost and capex reductions together with the improvement in EBITDA have helped Bite to reduce the net free cash outflow in the 12 month period to Q110 to EUR0.7m (compared to an LTM outflow of EUR18.8m to Q109), indicating that the risk of a new liquidity crisis is receding. The company's available debt facilities are all fully drawn, so its only liquidity source is cash, which stood at EUR8.7m at end-Q110, the highest level since Q109. Fitch notes that recent amendments to the EUR30m RCF require that Bite reduces the outstanding balance in stages starting from June 2011, and this will depend on Bite's ability to generate positive FCF.

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