Moody Confirms KPN's Debt Ratings with a Negative Outlook
Moody's Investors Service has today confirmed Netherlands based KPN's debt ratings - with a negative outlook.
The confirmation follows the release of KPN's financial results and outlook for 2013 as well as its plans to raise EUR4 billion through a fully underwritten rights issue in order to strengthen its financial profile. KPN may consider whether, subject to market conditions, part of the EUR4 billion capital raise could alternatively be raised through equity-linked or other capital instruments.
The rating action concludes the review for downgrade that Moody's initiated on 18 December 2012.
"Our confirmation of KPN's Baa2 rating reflects the company's strong commitment to maintaining its investment-grade rating. This is demonstrated by the announcement of a sizeable rights issue, which broadly offsets the expected impact of the company's deteriorating operating performance on its credit metrics," says Iván Palacios, a Moody's Vice President -- Senior Credit Officer and lead analyst for KPN.
Moody's estimates that the rights issue will enable KPN's Net reported debt/EBITDA to improve by around 0.9x. "Therefore, we now expect the company's reported net leverage to remain within the 2.0x-2.5x range through the 2013-2015 period," adds Mr. Palacios.
KPN's announced rights issue is sizeable, amounting to around two thirds of the company's market capitalisation before the announcement, and represents further proof of the company's commitment to strengthen its balance sheet. The rights issue follows KPN's other credit-positive moves like the cancellation of the share buyback in early 2012 and the material reduction in dividends to only EUR0.03 per share, compared with EUR0.85 per share paid in 2011. However, the rights issue also reflects that the company has exhausted all available internal options to protect its financial profile and can now only revert to external options, reflecting its very limited financial flexibility.
KPN's operating performance remains weak and is the main source of concern for Moody's. In FY2012, KPN's reported EBITDA declined to EUR4.5 billion from EUR5.1 billion in the previous year, although the reduction would be larger if the impacts of tower sales and handset lease accounting are excluded.
Moody's expects KPN's performance in the 2013-2015 period to continue to be impacted by the combination of a weak macroeconomic environment, tough regulation and fierce competition. In the Dutch market, the company will have to face a new mobile competitor, Tele 2, which has recently secured spectrum in the 800 MHz band. In its Mobile International segment, KPN is recording a slowdown in its growth rate as existing customers are trading down to cheaper tariffs. In order to mitigate some of these negative trends, the company is pursuing a more aggressive quadruple-play offering in The Netherlands to reduce churn. In Germany and Belgium, the company is changing its strategic focus, targeting long-term market share growth, at the cost of lower margins in the near term. In Moody's view, this strategic shift is not free from execution risk.
Liquidity will materially strengthen with the proceeds from the rights issue, as the amounts raised will be enough to cover the bond maturities in 2013 (EUR1.1 billion), 2014 (EUR1.4 billion) and 2015 (EUR1 billion). In addition, the company has also recently strengthened its liquidity position by means of an additional EUR500 million backstop facility provided for the March 2013 bond redemption and ahead of refinancing in the capital markets. This backstop facility will be cancelled if it remains unused by the end of Q1 2013.
The Baa2 rating continues to be supported by KPN's leading position as incumbent in the Dutch market and the benefits derived from its geographical diversification in Germany and Belgium, where KPN operates as a mobile-centric market challenger. The rating also reflects the expected solid liquidity profile further to the successful completion of the announced rights issue. These considerations are balanced by KPN's relatively weak metrics for the rating category, with net debt/EBITDA (as adjusted by Moody's) trending towards 3.0x through the rating horizon, the track record of declining operating performance and profit warnings, and the lack of financial flexibility as the company has run out of internal options to protect its financial profile.