OREANDA-NEWS. Fitch Ratings has assigned eircom Finance DAC's proposed EUR350m bond issue an expected rating of 'B+(EXP)'/'RR3'. The proposed issuance has a maturity of 2022, is being issued on a senior secured basis, and will rank pari passu and benefit from the same security package as the group's EUR2.0bn secured bank facilities (rated B+/RR3, borrowed at the eircom Finco S. a.r. l level).

Proceeds of the issuance will be used to refinance the group's existing EUR350m 2020 secured notes, which currently pay a coupon of 9.25%. Pricing of the proposed transaction is expected to result in significant cash interest savings, and provide stronger free cash flow (FCF) over time, although transaction and break fees will have a negative impact in the financial year ending June 2016 (FY2016). Relative to Fitch's previous rating case, we estimate FCF improvements of around EUR10m on a full year basis and FY17 FCF now in the region of EUR70m, including forecast commitment fees payable on the revolving credit facility (RCF) the group is also currently arranging.

The final rating is contingent upon the receipt of final documents conforming to the information already received.

KEY RATING DRIVERS

Bond Issuance and RCF

Pricing on the proposed bonds should represent a material improvement on the 9.25% coupon currently paid on the 2020 maturity. The bonds will benefit from the same security and guarantor package as the existing bonds and the group's core EUR2.0bn bank facilities and therefore receive a similar instrument and Recovery Rating. The transaction will achieve maturity and cash flow benefits over the term of the issuance, reflecting what Fitch views as active and effective treasury management. The company is also establishing a EUR150m RCF maturing 2021, on pari passu terms with the rest of the capital structure. Fitch views the RCF as prudent liquidity management and a further sign of proactive management, potentially allowing the company better use of its balance sheet cash given the marginal returns available in the low policy rate environment.

Security Structure

Similar to the structure of the existing bonds and the bank loan, security includes guarantees from principal operating subsidiaries, security over group operating assets along with down/cross - stream guarantees from the principal holdcos, share pledges over the latter's shares in subsidiaries and security given by the issuer over the intercompany loan used to pass on the proceeds of the notes within the group; a similar pledge is provided over the intercompany loan used to channel the bank loan on within the group.

For the 12 months to March 2016, guarantor subsidiaries represented 100% and 99.85%, respectively, of group consolidated adjusted EBITDA and assets. The terms of payment priority in the event of enforcement are governed by an intercreditor agreement. Hedging liabilities are treated on a super senior basis. Fitch views the security package as comprehensive and characteristic of the type of structure typical for an infrastructure type telecoms business in the 'B' rating category.

FCF, Leverage

The revision of eir's Outlook to Positive in April 2016 was underpinned by Fitch's view that the business profile supports a stronger rating than the current 'B' and that forecast FCF performance in FY17 suggests cash flow and leverage metrics more consistent with a 'B+' rating. The proposed transaction will be mildly negative for FCF in FY16, relative to our previous rating case, given associated arrangement and break fees. Fitch's forecast FFO lease adjusted net leverage for FY16 is largely unchanged at 5.2x. FCF performance in subsequent years is forecast to be stronger given the improved funding costs on the bonds. A stronger forecast FCF performance in particular is supportive of the Positive Outlook, while our rating case expects FFO net leverage of around 4.8x by FY17, compared with the upgrade guideline of at or below 5.0x.

Recoveries

Recoveries on the proposed issuance are based on a going concern approach to the business, given the company's underlying operating profile and substantial fixed asset base. Fitch's bespoke assumptions in general, include the premise that availability under an RCF would be fully utilised in the event of corporate distress. The addition of a EUR150m RCF in eir's case is therefore marginally negative in our recovery analysis, while Fitch acknowledges the benefits in terms of the company's strengthened and more diversified liquidity. Including super senior hedging liabilities in our revised recovery analysis, recoveries on the proposed bonds are assessed at around 65%, consistent with an 'RR3' Recovery Rating. This is the same as that applied to the existing 2020 bonds and bank debt.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for eir include:

-Low single-digit revenue growth through to FY19

-Stable EBITDA margin of around 39% from FY16 to FY19

-Cash tax above EUR20m p. a. from FY16

-Non-recurring cash outflows related to restructuring provisions and onerous contracts around EUR30m in FY16 and EUR10m in FY17

-Capital expenditure at 21% of revenues in FY16 and FY17, reducing to 19% and 18% in the following two years

-No further acquisitions beyond Setanta Sports

- Around EUR20m in break costs and arrangement fees associated with the planned bond issuance in FY16

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to an upgrade include:

FFO adjusted net leverage expected to remain at or below 5.0x on a sustained basis when combined with:

- FCF margin expected to be consistently in the mid-single digit range.

- Ongoing revenue stability and EBITDA improvement, achieved through the ongoing stabilisation of fixed key performance indicators (KPIs) and improving mobile trends.

Negative: Future developments that may, individually or collectively, lead to a downgrade include:

-FFO adjusted net leverage approaching 6.0x accompanied by negative FCF. This would imply the stabilisation so far achieved has not been sustained or that competition is continuing to force higher levels of capex than envisaged in our base case, while deteriorating operating trends would be a greater risk.

-A material reversal in positive operating trends - key measures being fixed access losses, overall broadband accesses and the mix in pre - and post-paid mobile customers.

LIQUIDITY

Liquidity is provided by the company's underlying balance sheet cash - unrestricted cash was EUR156m at end-March 2016. The proposed RCF will add EUR150m, which given balance sheet cash and the path to FCF envisaged in our forecasts provides substantial liquidity. Fitch believes management may choose to use some of its cash to prepay part of the bank loan given the low returns currently achievable across the eurozone on cash balances.