Fitch Ratings has today affirmed Greece-based Hellenic Telecommunication Organizations's (OTE) Long-term Issuer Default rating (IDR) at 'BBB' with Stable Outlook. At the same time, the agency has affirmed OTE PLC's senior unsecured rating at 'BBB'.
Fitch says that the rating reflects OTE's leading positions in its domestic market for fixed and mobile and its strategy to offset the decline in the fixed-line business with growth in the mobile segment amid a shrinking Greek economy. However, growing competition and increased regulatory risk due to lower termination rates (with effect from Jan 2009) will impact the operating performance of the mobile business, Cosmote, in FY09-10. Key performance indicators for the Greek mobile business have shown a declining trend since H208 as competition in prepaid translates into lower average revenue per user and, consequently, lower EBITDA margins. Furthermore, line losses at OTE's fixed-line business are continuing, albeit at a slower pace than FY08, and broadband growth has slowed considerably as a result of higher penetration rates and a difficult local operating environment.
Free cash flow generation improved to EUR429m at FY08 from EUR10.8m in FY07, which is commensurate with its rating. Fitch estimates that lease-adjusted net debt/operating EBITDAR will be about 2.2x at FYE09, within the confines of the current rating. However, EBITDA will decline in 2009 due to a tough economic environment and deteriorating fundamentals of the Greek mobile business. Expected annual dividends of EUR375m and capex of nearly EUR950m-EUR1,000m continue to depress cash flow, but Fitch is confident that the company will continue to de-leverage in the medium term, thanks to continued free cash flow generation.
The new voluntary retirement plan of 600 employees (this figure may increase in FY09-10) and cost controls may help operating margins to a certain extent, but the slowing growth and the operational weakness in the mobile segment will dent the overall operating performance of the company. Fitch believes OTE can benefit from the presence of its new shareholder, Deutsche Telekom (25%), in terms of operational synergies such as procurement of technical equipment, economies of scale in purchasing handsets and marketing - mainly within Cosmote. Fitch notes that these synergies may alleviate some of the operating pressures on the company and benefit the operating margin in the long-run after 2011.
Fitch will continue to monitor the relationship between Deutsche Telekom and OTE and its implications under Fitch's Parent Subsidiary Rating Linkage. While the agency sees the presence of Deutsche Telekom as a credit-positive, the ratings presently continue to reflect OTE's stand-alone credit profile with no specific uplift from the German group.
Fitch notes that pursuing a more aggressive dividend distribution programme and share buybacks or any aggressive acquisitions in the Balkans, rather than applying cash flow generation to debt reduction as expected, may have negative implications for the ratings.
Liquidity in the form of cash (EUR1.42bn at end-Q109), available facilities and expected positive free cash-flow generation is strong and covers financial obligations until FY11. However, refinancing risk is expected to peak in 2011 (EUR2,167m) and most of the debt repayments are concentrated in the 2011-2013 period.
Posted to the site on 23rd June 2009
Posted to: www.cellular-news.com/story/38152.php