KPN's Weak Results Add Downward Rating Pressure; Outlook Remains Negative
Moody's Investors Service has today said that Netherlands based KPN's Q3 2012 results are weak, but broadly in line with Moody's expectations, as embedded in the negative outlook on the group's ratings. However, downward pressure on the ratings is increasing. Moody's view is based on the expectation that KPN is likely to exceed its financial leverage target for the coming quarters in the absence of further measures that can mitigate the impact of its weak performance on its financial profile.
In Q3 2012, KPN's consolidated revenues declined by 6.5% compared with Q3 2011, to EUR3.0 billion, while its consolidated EBITDA (excluding restructuring costs) dropped at a faster rate, by 12%, to EUR1.1 billion. KPN's domestic business has shown some early signs of stability in terms of market share, but now the German business is slowing down as a result of a fiercer competitive environment and existing customers moving to cheaper tariffs.
KPN has confirmed its outlook for 2012, including achieving EBITDA of EUR4.7-4.9 billion. However, visibility beyond 2012 remains very low, and the company expects operating conditions in 2013 to remain challenging.
In terms of leverage, the group has reported a net debt/EBITDA ratio of 2.7x, exceeding the financial framework leverage target of 2.0x.2-5x for the second consecutive quarter. In the absence of corrective measures, management now expects to exceed this ratio range in the coming quarters due to possible upcoming strategic investments. This is despite KPN having taken important measures this year to mitigate the deterioration in its financial profile, such as the cancellation of its share buyback programme in January and the cut in dividends from EUR0.9 to EUR0.35 per share in July.
Within the next few months, a number of uncertainties that could adversely affect KPN's business and financial profiles will be clarified. These include the outcome of the spectrum auction in the Netherlands, the potential entry of a fourth player in the Dutch mobile market, and the mobile termination rate (MTR) reduction in Germany. KPN will have to incorporate the outcome of these events in its 2013 guidance, which the group typically shares with the market at the time of the publication of its full-year results.
Moody's believes that management may have limited options to mitigate the impact of a further deterioration in operating performance on its financial profile. KPN may have to choose between reducing its current shareholder remuneration policy or tolerating higher leverage than historically on a sustained basis, which would most likely translate into a lower rating.
The negative rating outlook reflects that KPN has exhausted its financial flexibility at the current rating level and that there is limited headroom for the group to deliver on the commitment to meet its financial policy targets.
Further downward pressure on the rating could potentially result from any further deterioration in KPN's operating performance beyond management's guidance for 2012, causing a sustained deviation from its committed financial discipline. More specifically, the rating could come under negative pressure if the group's credit protection measures weaken, such that its retained cash flow (RCF)/net adjusted debt drops below the low twenties in percentage terms and its net debt/EBITDA (as reported by the company) is higher than 2.5x on a sustained basis.
Upward pressure on the rating is unlikely given the negative outlook. However, the outlook on the rating could revert back to stable if KPN stabilises its operating performance in the Dutch market, while maintaining a net debt/EBITDA ratio (as reported by the group) in the 2.0x-2.5x range and an RCF/net adjusted debt in the 20%-25% range.