Fitch Affirms Spain's Cellnex at 'BBB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Spain-based Cellnex Telecom S.A.'s (Cellnex) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. The Outlook on the IDR is Stable.
The ratings reflect the stability and visibility of Cellnex's cashflow streams. This is derived from inflation-linked long-term contracts of the group's mobile towers portfolio in Spain and Italy and the market position of the group's TV broadcasting infrastructure in Spain. Cellnex has a strong and scalable, cash-generative business model with low capital intensity requirements relative to the telecoms sector and demand-driven growth capex that reduces related investment risks.
The company is making progress in deleveraging following the acquisition of mobile tower operator Galata in 1Q15. Funds from operations (FFO)-adjusted net leverage of 5.5x at end-2015 was lower than our expectations by 0.3x. Fitch expects that leverage will continue to decline during 2016 to around 5.1x, assuming a 20% dividend pay-out ratio. This excludes any future M&A that the group may or may not undertake which Fitch will assess on its individual merit, based on the impact it would have on the company's credit and operating profile.
KEY RATING DRIVERS
Contractual Revenue Visibility
Cellnex derives about 49% of its revenues from its telecoms site rental business in Spain and Italy, 37% from its broadcasting infrastructure in Spain and 14% from network and other services.
The contracts for Cellnex's telecoms site rental are typically 10 to 15 years long while TV broadcasting contracts are up to five years long. The long duration of the contracts reflects the high dependency of mobile operators and broadcasters on the infrastructure that they rent from Cellnex. The contracts are inflation-linked and fixed with a high chance of renewal for a further 10 to 15 years on terms that have been pre-determined as part of the original contracts. This provides long-term visibility and stability to the group's cash flows.
Cash-Generative Business Model
Fitch estimates that Cellnex has the ability to generate a pre-dividend free cash flow (FCF) margin of 22% to 23% of revenues. The strong margin is a combination of underlying rental contracts, economies of scale in operations, the pass-through of certain costs to clients (e.g. energy costs) and low capital intensity requirements for maintenance of 3% to 4% of revenue. While Cellnex may have further capex related to expansion or tower consolidation projects, this is typically deployed with visibility on project economics.
Cellnex could further expand its margins depending on the growth of towers, increase in tenancy ratios and rationalisation of mobile towers.
Growth-Supportive Sector Trends
Mobile operators are likely to maintain their dependence on tower providers due to growing data capacity requirements, geographic coverage obligations and the need to reduce costs. The lack of EU clearance for in-market consolidation between mobile network operators may also provide greater opportunity for tower companies to grow their tenancy ratios. In 1Q16 Cellnex raised its tenancy ratios by 5.5% yoy to 1.54 while increasing its points of presence (POP) by 5.3% to 20,954.
TV Broadcasting Risks
The shift in advertising spend away from TV to other forms of media, such as the internet, is an industry risk, which creates some uncertainty around the long-term revenue streams of Cellnex's TV broadcast infrastructure business in Spain. A reduction in the number of TV channels could see a decline in frequencies used for broadcasting with consequential revenue loss for Cellnex. There is currently no evidence of the materialisation of this risk in Spain.
On a comparative basis, Spain has one of the highest proportions of households (over 80%) who view TV via digital terrestrial (DTT) broadcasting, which bodes well for prospects in the short- to medium-term. In the long run, competition from pay-TV operators may erode the share of DTT.
Operating Leases Matched by Revenue
Cellnex has significant operating leases, which have thus far contributed to EUR1.1bn to Fitch-adjusted net debt. However, Cellnex's ratings recognise that a significant proportion of these leases are based in Italy, where the average contract duration is higher than the average lease term, the backlog of revenue is significantly greater than the total costs of the leases and that the group has some flexibility in cancelling leases if needed.
Progress on Deleveraging
The acquisition of Galata in 1Q15 raised FFO-adjusted net leverage to 5.5x in 2015 from 2.8x in 2014. This was, however, still lower than expected by 0.3x, primarily due to higher-than- expected EBITDA. Based on a dividend pay-out ratio of 20% of FCF (as defined by company), Cellnex has the ability to deleverage by 0.4x to 0.5x per year. As a result we expect leverage will reduce to around 5.1x by FY16.
After 2016, strong FCF generation will provide significant scope to raise the dividend pay-out ratio while allowing Cellnex's leverage to remain consistent with a 'BBB-' rating.
Fitch's key assumptions within our rating case for the issuer are detailed below.
-Revenue growth of 14% in FY16 due to full-year acquisition benefits (primarily Galata) and recovery of Spanish TV broadcasting before stabilising at 2%-3% per year thereafter (broadly reflecting modest improvements in tenancy ratios, stable number of total towers and average revenue per tower growth being in line with inflation).
-EBITDA margin of 39% to 40% in 2016, gradually increasing to just below 42% by 2019, reflecting efficiency measures and improvements in tenancy ratios.
-Discretionary expansion capex of around 8% of revenue which, alongside maintenance capex, increases total non-M&A capex to 11%-12% of revenues annually. No further M&A expenditure is assumed.
- Adjusted debt of EUR 1,070m. This is based on a blended lease multiple of 7.7x, reflecting 5x multiple relating to satellite lease expenses and 8x multiple for tower rental and other operating lease expenses.
-Dividend pay-out at around 20% of recurring levered FCF (as defined by company) for 2016.
-Wind Telecomunicazioni SpA exercises its EUR77m Galata put option in 2016 at first available opportunity.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- A decrease in FFO-adjusted net leverage to below 4.5x on a sustained basis, which could lead to an upgrade to 'BBB';
- Fixed charge cover of 3x or higher (2015: 2.7x).
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A failure to reduce FFO-adjusted net leverage below 5.0x on a sustained basis two years after the Galata transaction, with Fitch expecting to see significant and consistent deleveraging progress during this period;
- Deterioration in FCF generation leading to a reduced ability to deleveraging while leverage is higher than the threshold for the 'BBB-' rating and FCF margin at below 10% (2015: 0%);
- Fixed charge cover below 2.5x on a sustained basis;
- Significant deterioration in the operating environment, due to consolidation within the mobile market or market trends in digital terrestrial TV leading to a material reduction in revenue.