Fitch Affirms Sunrise Communications Holdings S.A. at 'BB+'/Stable
OREANDA-NEWS. Fitch Ratings has affirmed Sunrise Communications Holdings S.A.'s (Sunrise) Long-Term Issuer Default Rating (IDR) at 'BB+ with a Stable Outlook. Fitch has also affirmed Sunrise's and Sunrise Communications AG's senior secured debt ratings at 'BBB-'. A full list of rating actions is available at the end of this commentary.
The affirmation reflects Sunrise's ability to maintain the company's stable share in a competitive Swiss mobile market while growing scale in the company's fixed-line business. Sunrise has generated stable cash flows since its IPO in February 2015, despite a decline in EBITDA (-2.8% LTM to March 2016). However, spectrum payments and initial dividends will increase leverage by the end-2016, limiting the company's headroom for the next two to three years.
Fitch expects Sunrise's funds flow from operations (FFO)-adjusted net leverage to gradually decline to 3.5x by 2018 from 3.8x at end-2016 as the company approaches its target leverage of 2.5x net debt/EBITDA (which maps to approximately 3.5x FFO-adjusted net leverage). A lack of consistent progress in reducing leverage over the next 18 months could result in downward pressure on the ratings.
KEY RATING DRIVERS
Stable Cash Generation
Sunrise has generated stable cash flows following its IPO and refinancing in February 2015, which substantially brought down interest costs. A revenue decline of 8% in the LTM to March 2016 has only translated into a 2.8% EBITDA decline as the company is realising cost efficiencies, principally from a headcount reduction at end-2015. While part of the lost revenue is related to low-margin business, competition in mobile, structural declines in landline voice and roaming price reductions have only in part been compensated by growth in Sunrise's fixed-line products.
Expected Leverage Increase
A final spectrum instalment of CHF110m due in December 2016 and the first dividend payment of CHF135m should raise FFO-adjusted net leverage to 3.8x by end- 2016, according to our forecasts.
Capex levels (excluding spectrum) are normalising after investments peaked at CHF356m in 2014 and CHF276m in 2015. At the same time, the company is committed to a dividend pay-out of at least 65% of equity-free cash flow. We therefore expect Sunrise to gradually reduce FFO-adjusted net leverage to 3.5x in 2018, on the back of stabilising revenues and improved margins following restructuring efforts.
Stable Mobile Market Position
Sunrise has a stable, number-two position in the Swiss telecoms market, which is dominated by the incumbent, Swisscom. Sunrise's predominant strengths are within the mobile segment, where it has maintained a stable revenue market share of around 25% and more recently increased its share of higher average revenue per user (ARPU) post-paid subscribers. Its position in the fixed line market is fairly small; however, the company is steadily improving its market share in this segment, which should help Sunrise retain its higher-value mobile customers as fixed-mobile bundles become more important to consumers.
Building Scale in Fixed
Sunrise is starting to stabilise fixed line revenues since its successful renegotiation for more favourable wholesale terms for high-speed broadband access in 2014. The company has been successfully selling IPTV and multi-play bundles, growing its broadband customers by 6% YoY as of end-March 2016. At the end of 2015, Sunrise accounted for approximately 9.4% and 3% of broadband and TV subscribers, respectively, in Switzerland (9.3% and 2% at end-2014). The uptake of bundles has also helped stabilise fixed voice disconnections although the structural revenue decline from this segment continues to weigh on overall fixed line revenues, which declined 4.8% in LTM to March 2016 (-7.9% in the same period to March 2015).
With over a 50% share and about a 75% share of the broadband and fixed voice subscriber markets, respectively, Swisscom is a dominant incumbent in the Swiss market. As an unbundled local loop provider, Sunrise is vulnerable to competition, mainly from Cablecom and Swisscom, which have been successful in marketing bundles with ultra-broadband speeds.
Competitive Mobile Market
Competition in the mobile market has been putting pressure on ARPUs as promotional activity remains intense, especially in the lower-value segment of the market, which features attractive post-pay offers. The acquisition of Salt (previously Orange) by NJJ Capital in April 2015, a vehicle funded by Xavier Niel, the founder of Iliad in France, has however not had a disruptive impact on the market. Although Salt launched year-end promotions, which were largely followed by the market, Salt's subscriber and revenue trends have weakened.
Fitch expects some pressure on ARPUs, which are among the highest in Europe, to persist in the next few years. 4G take-up and mobile data consumption, however, are seeing some reprieve from a recent deceleration in ARPU declines. The discontinuation of handset subsidies initiated by Sunrise in mid-2012 is supportive of margins and the company has nearly completed the transition to the unsubsidised model without adverse churn effects.
-Low single-digit revenue declines stabilising gradually through 2018-2019, reflecting a stable market position but also continued competition;
-Gradual EBITDA margin improvement to 33% over the next two to three years from 32% in 2016;
-Capex (excluding spectrum)-to-revenue stable around 12% in 2016-2018;
-Dividend payments of 65% equity free cash flow, in line with company guidance;
-Non-recurring cash restructuring costs of approx. CHF11m in 2016, relating to headcount reduction;
-No M&A activity.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- FFO-adjusted net leverage below 3.0x (2015: 3.4x)
- FFO fixed charge cover above 3.7x on a sustained basis (2015: 3.8x)
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Failure to reduce FFO-adjusted net leverage to 3.5x on a sustained basis;
- FFO fixed charge cover below 3.2x on a sustained basis;
- Loss of service revenue market share or expectations of negative free cash flow (FCF), excluding spectrum payments, in the next two years
Sunrise held cash and cash equivalents of CHF215m at end-March 2016 and benefits from an undrawn revolving credit facility of CHF200m with a maturity in 2020. Pre-dividend FCF, excluding spectrum payments in 2015, was CH164m and the company does not have any debt maturities before 2020.
FULL LIST OF RATING ACTIONS
Sunrise Communications Holdings SA
Long-Term IDR: affirmed at 'BB+' / Stable
Senior secured notes due 2022: affirmed at 'BBB-'
Sunrise Communications AG
Term loan B facility due 2021: affirmed at 'BBB-'