S&P: Bulgarian Telecommunications Co. (Vivacom) Upgraded To 'B+'; Outlook Stable; Off CreditWatch
We removed the rating from CreditWatch, where we had placed it with negative implications on Oct. 22, 2015, and with developing implications on April 2, 2015.
At the same time, we raised our long-term issue rating on Vivacom's senior secured debt to 'B+' from 'B-'.
We revised up the group credit profile after the €150 million loan at Vivacom's Luxembourg-based holding company, InterV Investment S. a.r. l. (InterV) was refinanced as part of a change in ownership. The loan matured in May 2015. As announced by Russian VTB Bank, which is the key lender to InterV and an indirect shareholder of Vivacom, the sale of 100% of shares in InterV was successfully completed on Aug. 30, 2016. InterV was acquired by Viva Telecom (Luxembourg), owned by various individuals; VTB Bank retained 20% minus one share. The transaction was partly financed through a €240 million facility extended by VTB Bank to Viva Telecom (Luxembourg), and part of the proceeds were used to repay the €150 million equity bridge loan. As a result, we have revised our assessment of the group's liquidity to adequate from weak.
We revised down our assessment of Vivacom's stand-alone credit profile (SACP) to reflect the increase in debt, resulting in an adjusted leverage (including holding company debt) of about 4.5x from less than 4.0x previously. In addition, the near-term maturity of the new €240 million facility creates significant refinancing risk for the group and puts pressure on the rating, which we reflect in our one-notch comparable rating analysis modifier.
That said, we continue to see Vivacom as an insulated entity of the group, owing to several key restrictions in the indenture, including, but not limited to:No cross default between the €400 million senior secured notes of Vivacom and the holding company level debt;Restrictions on payments from Vivacom to the holding company;The fact that Vivacom holds itself as a separate entity, with separate funds, books, and liabilities;Our view that the new shareholders have no economic incentive to try to draw the subsidiary into any proceedings, as the bondholders have a first-lien security over Vivacom's shares. We also factor in that the previous failure to repay the €150 million equity bridge loan did not impact the performance of the restricted group of Vivacom.
Our assessment of Vivacom's SACP continues to reflect Vivacom's solid market position in Bulgaria as the largest telecoms operator, holding the leading position in fixed-line telephony, with a market share of 69% by revenues, and the No. 2 position in fixed-line broadband Internet, with a 25% market share. Vivacom's market position is supported by multiproduct offers, including land-line telephony, broadband Internet, pay-TV, and mobile telephony. In mobile, which generated circa 57% of Vivacom's revenues in the first half of 2016, the company increased its market share to 28% in June 2016 from 27% in December 2015, thanks to 1.3% growth in its subscriber base starting in December 2015 and 3.6% growth year on year.
That said, Vivacom's reported EBITDA margin declined to 36.6% in the first half of 2016 from 41.5% in the first half of 2015 because of higher operating costs and competitive pressure from subsidiaries of meaningfully larger telecoms operators in the Bulgarian market.
Our stable outlook on Vivacom reflects our view that adjusted debt (including holding company debt) to EBITDA will not exceed 4.5x and that liquidity at Vivacom and at the group level will remain adequate.
We may downgrade Vivacom if refinancing risks at Vivacom or at its parent are not addressed by early 2017. We could also lower the rating if the group's adjusted debt to EBITDA exceeds 4.5x, which could be caused by further declines in profitability.
Rating upside is remote in the next 12 months. We could upgrade Vivacom if the maturity profile of its debt was extended, combined with adjusted leverage (including holding company debt) moving comfortably below 4.5x and free operating cash flow to debt above 5%.