KPN Debt Ratings Downgraded
Published on: 28th Mar 2014
By: Ian Mansfield
Netherland's based KPN has seen its debt ratings downgraded to Baa3 by Moody's although the outlook for future downgrades is now stable.
Following the company's release of its full year 2013 results and strategic update for 2014-15, Moody's has revised its forecasts for KPN. The revised forecasts show that KPN's EBITDA will bottom out in 2014 and recover very slowly thereafter, primarily as a result of the contribution of Reggefiber. Moody's expects that KPN will report net adjusted debt/EBITDA around 3.0x and Retained Cash Flow (RCF)/net adjusted debt of around 22%-24% in 2014-15. These ratios assume the successful completion of the sale of E-Plus, with the majority of proceeds used to reduce debt.
"Today's downgrade reflects our expectation that KPN's financial ratios will remain weak in 2014-15 with no prospects of recovery in the short-term to levels commensurate with the previous Baa2 rating category", says Iván Palacios, a Moody's Vice President -- Senior Credit Officer and lead analyst for KPN.
KPN's management made a substantial effort to protect the company's financial profile in 2013, through a EUR3 billion rights issue, the issuance of hybrid instruments providing EUR1 billion of equity credit and the planned sale of E-Plus for a total consideration of EUR8.5 billion, of which EUR5.0 billion will be received in cash. However, these measures have not been sufficient to bring credit metrics in line with levels commensurate with the previous Baa2 rating, primarily because of KPN's rapidly deteriorating operating performance resulting from a slow macroeconomic environment, and challenging competitive and regulatory environments.
The company is making the necessary investments to put its business on a stronger long-term footing. In fixed-line, KPN's domestic business is showing some signs of stability in terms of its revenues and market share, which are primarily driven by IPTV growth, helped by its hybrid copper/fiber strategy. In domestic mobile, the company has accelerated its investments in 4G to regain its historical competitive advantage. In addition, KPN has started a simplification programme which could lead to estimated savings of more than EUR300 million per annum by 2016.
However, despite these efforts, visibility on KPN's operating performance remains low, as competitive pressures in the Dutch market will remain intense in 2014 and 2015, following a similar trend in 2013. In fixed-line, it remains unclear at this stage whether recent price discipline can be maintained, with 2013 price increases by cable companies and KPN. In mobile, KPN reported very weak EBITDA generation in Q4 2013, which was partly driven by the reversal of the handset lease model and by extra investments in customer retention. The likely launch of a 4G offering by Tele 2 in 2014-15 could be very disruptive for KPN if it leads to further price-aggressive competition.
Despite these ongoing pressures and uncertainties, the stable outlook recognises the extra flexibility that KPN will have if the sale of E-Plus is completed as planned, with KPN retaining a 20.5% stake in Telefonica Deutschland. This stake will provide KPN with additional financial flexibility via dividends or additional cash proceeds in the event that KPN decided to sell this stake in the future. However, failure to complete the E-Plus transaction because of a lack of regulatory approval would be credit negative, as KPN would have limited internal options to protect its financial profile, given that asset sales would be very difficult, the company has no headroom to issue additional hybrids with extra equity credit, and dividend flexibility is very limited.
KPN's Baa3 senior unsecured rating is supported principally by its leading position in the Dutch market, integrated business model, and solid liquidity profile. These considerations are balanced by KPN's (1) track record of declining operating performance and profit warnings; (2) credit metrics which will initially be weak for the rating category; and (3) limited financial flexibility, other than via the monetisation of its 20.5% stake in Telefonica Deutschland.