Moody's Changes Outlook on BT Ratings to Positive from Stable
Moody's Investors Service has changed the outlook on British Telecom's (BT) ratings to positive from stable.
"Changing the outlook to positive reflects our expectation that BT's credit metrics will continue to improve over the medium term, driven by a resilient operating performance, its focus on cash flow generation to reduce debt, and its efforts in bringing its pension deficit under control," says Iván Palacios, a Moody's Vice President - Senior Credit Officer and lead analyst for BT. "We believe that BT's strong track record in executing its business plan and its conservative financial policies will play a part in improving its credit metrics further," adds Mr. Palacios.
BT continues to report a resilient operating performance, with consistent growth in EBITDA over the past three years despite the challenging operating environment, which is exerting pressure on the group's revenues. While Moody's expects BT's revenues to continue declining over the medium term, the rating agency notes that some of the revenue lost is low-margin, while also deriving comfort from the group's demonstrated capacity to cut costs in order to improve margins, to be sustained into the future.
Moody's expects that BT's operating performance will benefit from rising consumer demand for bandwidth capacity. In order to defend its strong market position from cable competition and the threat of mobile broadband, BT is successfully increasing its fibre footprint while upgrading its content through TV bundles and acquiring premium sports rights.
Going forward, BT is also likely to benefit from some of the favourable structural features of the UK market compared with other European countries, such as relatively stronger GDP growth prospects, better demographics and price inflation in its telecom sector.
Nevertheless, Moody's cautions that the sustained decline in revenues is a concern given that there is no visibility as to when this trend will reverse. If this trend accelerates over time, the company's ability to continue cutting costs to mitigate pressure on cash flow might be challenged.
BT has a conservative financial policy aimed at balancing shareholder remuneration with bondholder protection. Given BT's stable cash flow generation and a predictable dividend policy, which promises 10%-15% growth in dividends per share over the next three years, Moody's expects that the group will use excess cash to reduce its GBP9.1 billion of reported net debt (as of June 2012). As a result, the rating agency would expect BT's key credit metrics to strengthen over time such that adjusted retained cash flow (RCF)/adjusted net debt raises sustainably above 25%, and adjusted total debt/EBITDA falls sustainably below 2.5x. These ratio levels are consistent with a Baa1 rating for BT, the medium-term rating target stated in the group's financial policies.
The improvement in BT's adjusted credit metrics will also benefit from structural improvements in the group's pension deficit position. Such structural changes include the use of the Consumer Prices Index (CPI), rather than Retail Prices Index (RPI), which reduced BT's pension deficit by around GBP2.9 billion as at September 2010, and the GBP2 billion extraordinary contribution that the group made to its pension plan in March 2012. These changes helped to reduce BT's pension deficit to GBP2.5 billion as of June 2012 from the GBP7.9 billion reported in FY March 2010.
BT's Baa2 rating reflects the group's position as the largest communications service provider to the residential and business markets in the UK. The rating also takes into consideration BT's strong underlying operating performance, particularly the substantial improvement in the group's EBITDA margin. These improvements continue to support BT's free cash flow generation, ongoing debt reductions and an amelioration in financial metrics. However the rating also reflects the group's lack of a mobile business, the impact of deregulation and competition on the group's market position and BT's large and volatile accounting pension deficit which remains a drag on the group's credit metrics.
The positive outlook incorporates Moody's expectation of a continued improvement in BT's credit metrics and leverage reduction.