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Rating Action: Moody's changes Tele Columbus' outlook to negative
04 Sep 2018
London, 04 September 2018 -- Moody's Investors Service ("Moody's") has today changed the outlook on the ratings of Tele Columbus AG ("Tele Columbus" or "the company") to negative from positive. At the same time, Moody's has affirmed the company's B2 corporate family rating (CFR), the B2-PD probability of default rating (PDR) and the B2 senior secured debt ratings.
"The change in outlook to negative from positive takes into account the unprecedented material operational challenges facing the business, which will lead to a meaningful under-performance of the company's EBITDA in 2018. As a result, the company's leverage is expected to deteriorate to around 5.8x by year end, from our previous forecast of around 5.0x," says Gunjan Dixit, a Moody's Vice President -- Senior Credit Officer and lead analyst for Tele Columbus.
"It further reflects the company's tight liquidity profile with a heavy reliance on the revolving credit facility (RCF) as well as reduced covenant headroom of around 10% expected by the end of 2018," adds Mrs. Dixit.
A full list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
On 31st August 2018, Tele Columbus reported weak results for H1 2018 (year-on-year revenue decline of 2.2%; normalized EBITDA decline of 4.5%) and materially revised the growth guidance for 2018 downwards. The company now expects a normalized EBITDA of at least €235 million (compared to its previous guidance of €265-€280 million) in 2018 with a stable revenue development. The normalized EBITDA target includes a significant ramp-up of marketing spend in H2 2018. Furthermore, the management board expects significantly reduced non-recurring costs year on year in H2 2018. The management board will provide an update on the growth path for the company only in early 2019.
Tele Columbus faced several changes in its management over 2018 (new CEO and CFO appointed in January and July) and the new management has recently been focusing at finalizing the integration project. The management team has acknowledged that the integration of Pepcom took longer than expected and required more resources to be allocated; the integration is now expected to be completed by Q3 2018. The new management has also harmonized recognition policies for Homes Connected and revenue generating units across Tele Columbus, Primacom and Pepcom in order to provide more clarity and transparency going forward.
While the new management team remains committed and focused on the execution of the turnaround plan, it still needs to address a number of challenges such as the timely and successful completion of the Pepcom integration, transition of analogue TV to digital, and the rollout of the ERP/BSS platforms. Moody's therefore cautiously takes into consideration the meaningful execution risks associated with the turnaround plan.
The company's gross debt/ EBITDA (as adjusted by Moody's) was 5.2x based on the last twelve months ended 30 June 2018. Moody's expects this ratio to deteriorate to around 5.8x by the end of the year based on the company's updated EBITDA guidance. Furthermore, it remains unclear if the business will turnaround successfully such that the normalized EBITDA is back to growth from 2019. This implies that the company's leverage may remain high for the next 12-18 months.
As of 30 June 2018, the company had cash and cash equivalents of €28.3 million and drawings of €47 million under its €50 million RCF (due 2021). The company's free cash flow (after capex) was - €33 million in H12018, and for full year 2018, Moody's expects it to improve slightly but still remain negative. This implies that the company will continue to rely on its cash balance for the rest of 2018. In this regard, Moody's recognizes that the company's RCF is restricted by a maintenance financial covenant set at 6.5x (net debt/consolidated EBITDA, tested when the RCF is 35% drawn on a quarterly basis) under which headroom will tighten to around 10% by the end of 2018.
While the company is confident that it should generate sufficient cash flows going forward to cover its business requirements (as the non-recurring items related to the integration project are likely to be minimal after 2018), Moody's notes that the company can take additional measures to restore its liquidity position such as temporarily reducing its discretionary capex and drawing under the relevant carve-outs provided in its debt documentation. Besides the RCF, the company does not face any debt maturities before 2024 when its outstanding €707 million term loan falls due.
Tele Columbus' B2 CFR continues to reflect the (1) company's solid market position in core eastern German territories as well as key cities such as Hamburg, Berlin and Munich; (2) good quality of the fully owned and upgraded network; (3) long term contracts with housing associations supporting stability of revenues; and (4) the benefits in terms of additional disclosure and access to equity capital markets from its IPO in 2015.
However, the rating remains cognizant of (1) the relatively small scale of company's operations compared with other rated peers; (2) continued competition mainly from telecoms, which could intensify further should Vodafone Group Plc's (Baa1, on review for downgrade) acquisition of Unitymedia GmbH (B1, on review for upgrade) materialize in 2019; (3) high reported leverage, above the company's medium-term target of 3.0x-4.0x; and (4) capital spending peak limiting free cash flow generation as well as current tight liquidity position.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects the uncertainties surrounding (1) the successful execution of the company's turnaround plan and (2) the likelihood of the business returning to growth from 2019 onwards. It also takes into consideration the tight liquidity position of the company.
Stabilization of outlook will require (1) evidence that the business is on path to sustained revenue and EBITDA growth; (2) improvement in the group's liquidity position; and (3) reduction in the company's gross leverage to below 5.5x (Moody's adjusted).
WHAT COULD CHANGE THE RATING -- DOWN/ UP
Downward pressure for the rating could ensue in case (1) of a more than temporary deterioration of Tele Columbus' Moody's adjusted gross debt/EBITDA leverage ratio to a level above 5.5x; (2) of a failure in timely executing the turnaround plan such that the business fails to return to growth for a pro-longed period; and/ or (3) the management does not pro-actively address the company's tight liquidity position.
Upward ratings pressure is unlikely to develop in the near term. However, it could likely develop over time with (1) the business returning back to strong revenue and EBITDA growth; (2) steady operating progress including a continued growth in company's triple-play penetration while maintaining a stable homes connected base; and (3) maintenance of Moody's adjusted gross debt/EBITDA ratio sustainably below 4.5x together with positive free cash flow generation (after capex and dividends).
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Global Pay Television - Cable and Direct-to-Home Satellite Operators published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Tele Columbus AG is a holding company, which through its subsidiaries offers basic cable television services (CATV), premium TV services and, where the network is migrated and upgraded, Internet and telephony services in Germany where it is the third largest cable operator. The company is based in Berlin (Germany) and reported revenue of €491 million and EBITDA of €259 for the last twelve months period to 30 June 2018.
LIST OF AFFECTED RATINGS
Affirmations:
..Issuer: Tele Columbus AG
....Probability of Default Rating, Affirmed B2-PD
....Corporate Family Rating, Affirmed B2
....Senior Secured Bank Credit Facility, Affirmed B2
....Senior Secured Regular Bond/Debenture, Affirmed B2
Outlook Actions:
..Issuer: Tele Columbus AG
....Outlook, Changed To Negative From Positive
Rating Action: Moody's changes Tele Columbus' outlook to negative
04 Sep 2018
London, 04 September 2018 -- Moody's Investors Service ("Moody's") has today changed the outlook on the ratings of Tele Columbus AG ("Tele Columbus" or "the company") to negative from positive. At the same time, Moody's has affirmed the company's B2 corporate family rating (CFR), the B2-PD probability of default rating (PDR) and the B2 senior secured debt ratings.
"The change in outlook to negative from positive takes into account the unprecedented material operational challenges facing the business, which will lead to a meaningful under-performance of the company's EBITDA in 2018. As a result, the company's leverage is expected to deteriorate to around 5.8x by year end, from our previous forecast of around 5.0x," says Gunjan Dixit, a Moody's Vice President -- Senior Credit Officer and lead analyst for Tele Columbus.
"It further reflects the company's tight liquidity profile with a heavy reliance on the revolving credit facility (RCF) as well as reduced covenant headroom of around 10% expected by the end of 2018," adds Mrs. Dixit.
A full list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
On 31st August 2018, Tele Columbus reported weak results for H1 2018 (year-on-year revenue decline of 2.2%; normalized EBITDA decline of 4.5%) and materially revised the growth guidance for 2018 downwards. The company now expects a normalized EBITDA of at least €235 million (compared to its previous guidance of €265-€280 million) in 2018 with a stable revenue development. The normalized EBITDA target includes a significant ramp-up of marketing spend in H2 2018. Furthermore, the management board expects significantly reduced non-recurring costs year on year in H2 2018. The management board will provide an update on the growth path for the company only in early 2019.
Tele Columbus faced several changes in its management over 2018 (new CEO and CFO appointed in January and July) and the new management has recently been focusing at finalizing the integration project. The management team has acknowledged that the integration of Pepcom took longer than expected and required more resources to be allocated; the integration is now expected to be completed by Q3 2018. The new management has also harmonized recognition policies for Homes Connected and revenue generating units across Tele Columbus, Primacom and Pepcom in order to provide more clarity and transparency going forward.
While the new management team remains committed and focused on the execution of the turnaround plan, it still needs to address a number of challenges such as the timely and successful completion of the Pepcom integration, transition of analogue TV to digital, and the rollout of the ERP/BSS platforms. Moody's therefore cautiously takes into consideration the meaningful execution risks associated with the turnaround plan.
The company's gross debt/ EBITDA (as adjusted by Moody's) was 5.2x based on the last twelve months ended 30 June 2018. Moody's expects this ratio to deteriorate to around 5.8x by the end of the year based on the company's updated EBITDA guidance. Furthermore, it remains unclear if the business will turnaround successfully such that the normalized EBITDA is back to growth from 2019. This implies that the company's leverage may remain high for the next 12-18 months.
As of 30 June 2018, the company had cash and cash equivalents of €28.3 million and drawings of €47 million under its €50 million RCF (due 2021). The company's free cash flow (after capex) was - €33 million in H12018, and for full year 2018, Moody's expects it to improve slightly but still remain negative. This implies that the company will continue to rely on its cash balance for the rest of 2018. In this regard, Moody's recognizes that the company's RCF is restricted by a maintenance financial covenant set at 6.5x (net debt/consolidated EBITDA, tested when the RCF is 35% drawn on a quarterly basis) under which headroom will tighten to around 10% by the end of 2018.
While the company is confident that it should generate sufficient cash flows going forward to cover its business requirements (as the non-recurring items related to the integration project are likely to be minimal after 2018), Moody's notes that the company can take additional measures to restore its liquidity position such as temporarily reducing its discretionary capex and drawing under the relevant carve-outs provided in its debt documentation. Besides the RCF, the company does not face any debt maturities before 2024 when its outstanding €707 million term loan falls due.
Tele Columbus' B2 CFR continues to reflect the (1) company's solid market position in core eastern German territories as well as key cities such as Hamburg, Berlin and Munich; (2) good quality of the fully owned and upgraded network; (3) long term contracts with housing associations supporting stability of revenues; and (4) the benefits in terms of additional disclosure and access to equity capital markets from its IPO in 2015.
However, the rating remains cognizant of (1) the relatively small scale of company's operations compared with other rated peers; (2) continued competition mainly from telecoms, which could intensify further should Vodafone Group Plc's (Baa1, on review for downgrade) acquisition of Unitymedia GmbH (B1, on review for upgrade) materialize in 2019; (3) high reported leverage, above the company's medium-term target of 3.0x-4.0x; and (4) capital spending peak limiting free cash flow generation as well as current tight liquidity position.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects the uncertainties surrounding (1) the successful execution of the company's turnaround plan and (2) the likelihood of the business returning to growth from 2019 onwards. It also takes into consideration the tight liquidity position of the company.
Stabilization of outlook will require (1) evidence that the business is on path to sustained revenue and EBITDA growth; (2) improvement in the group's liquidity position; and (3) reduction in the company's gross leverage to below 5.5x (Moody's adjusted).
WHAT COULD CHANGE THE RATING -- DOWN/ UP
Downward pressure for the rating could ensue in case (1) of a more than temporary deterioration of Tele Columbus' Moody's adjusted gross debt/EBITDA leverage ratio to a level above 5.5x; (2) of a failure in timely executing the turnaround plan such that the business fails to return to growth for a pro-longed period; and/ or (3) the management does not pro-actively address the company's tight liquidity position.
Upward ratings pressure is unlikely to develop in the near term. However, it could likely develop over time with (1) the business returning back to strong revenue and EBITDA growth; (2) steady operating progress including a continued growth in company's triple-play penetration while maintaining a stable homes connected base; and (3) maintenance of Moody's adjusted gross debt/EBITDA ratio sustainably below 4.5x together with positive free cash flow generation (after capex and dividends).
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Global Pay Television - Cable and Direct-to-Home Satellite Operators published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Tele Columbus AG is a holding company, which through its subsidiaries offers basic cable television services (CATV), premium TV services and, where the network is migrated and upgraded, Internet and telephony services in Germany where it is the third largest cable operator. The company is based in Berlin (Germany) and reported revenue of €491 million and EBITDA of €259 for the last twelve months period to 30 June 2018.
LIST OF AFFECTED RATINGS
Affirmations:
..Issuer: Tele Columbus AG
....Probability of Default Rating, Affirmed B2-PD
....Corporate Family Rating, Affirmed B2
....Senior Secured Bank Credit Facility, Affirmed B2
....Senior Secured Regular Bond/Debenture, Affirmed B2
Outlook Actions:
..Issuer: Tele Columbus AG
....Outlook, Changed To Negative From Positive
