OREANDA-NEWS.  Fitch Ratings has affirmed UAB Bite Lietuva's (Bite) Issuer Default Rating (IDR) at 'B-' with a Stable Outlook and Bite Finance International BV's (BFI) bonds at 'B-'/RR4. BFI's senior secured revolving credit facility (RCF) has also been affirmed at 'B'/RR3.

Bite's ratings are supported by the continued cash flow generation improvements in its Latvian operations, the relatively stable performance in a challenging Lithuanian mobile market and better covenant headroom following the amendment of the company's RCF in 2014. Following the utilisation of the RCF to buy back bonds, the company's liquidity is more of a credit risk now.

Challenging Operating Conditions
Bite operates in two mature, relatively small markets where economic conditions are somewhat challenging and competition is high. In both markets, Bite competes against larger and more financially secure operators with experience and the benefit of operations in multiple countries. Tough competition combined with mobile termination rates declines has put pressure on companies' revenues over the past few years. However, both markets appear to be gradually becoming more rational while mobile operators are realising that intense price wars harm everyone, including the winners. Mobile tariffs are among the lowest in Europe and further price reductions are likely to make investments in infrastructure unjustified. The focus is shifting from price competition towards services differentiation on quality and monetisation of existing subscriber base.

Selective 4G Coverage
Bite aims to rollout 4G networks in the five largest cities in Lithuania and capital city Riga and its suburbs in Latvia in 1Q15. The company is currently lagging its peers in both markets as they have already covered the major part of the population. Traditionally the demand for mobile broadband services is higher in large cities. Bite's cherry-picking tactics with concentration on the most lucrative subscribers might prove to be efficient as the company will be able to provide superior quality services in selected areas without compromising the quality in less attractive regions. Mobile broadband demand in Lithuania is growing more slowly compared with Latvia and the rest of Europe and therefore the impact of 4G rollout on financials may be limited in the next one to two years.

Covenants Relaxed, More Comfortable Headroom
The company's secured bank RCF includes a leverage covenant that steps down over time. In April 2014, Bite amended the RCF, notably loosening leverage covenants and expanding the available amount to EUR30m from EUR20m. Potential pressure on covenant headroom was previously one of the key risks Fitch identified for the ratings. With the new covenant, Fitch expects that headroom will be around 20% at YE15 and remain comfortably above 15% in the forecasting period. Although we will continue to monitor covenant headroom closely, management's ability to renegotiate the test and its improvement gives the agency additional assurance for the rating level.

RCF Utilisation, Liquidity Pressures
Bite faces limited liquidity after drawing down its RCF. It opportunistically bought back a part of its senior secured notes issue of total notional amount of EUR27.7m in 4Q14. The decision was driven by favourable market conditions with high yield bond prices under pressure, which allowed the company to spend only EUR25m on the purchase. This was financed by cash and by drawing EUR15m out of its EUR30m RCF. The move implies interest expense savings of around EUR2m per year. The company aims to repay the RCF in 2015 with generated operating cash flow. The failure to repay the RCF as planned may lead to downward pressure on the rating.

Stable Metrics, Slow Deleveraging
The existing tough operating environment combined with mild margins pressures, suggest that EBITDA is unlikely to improve materially in the forecasting period. The non-aggressive investment programme combined with no growth in working capital would allow the company to continue generating positive free cash flow over the next three years and thus improve the overall net debt profile. Unadjusted leverage (net debt/EBITDA) will likely remain below 4.0x. The company's size and operating environment are constraints on the rating, especially a heightened competitive environment and if performance is weaker than planned.

-ARPU decline rates to slow down both in Lithuania and Latvia as a result of more rational competition
-Flat revenue yoy in 2015 and low single digits decline in 2016-2017
-EBITDA margin at slightly below 30% throughout forecasting period
-Repayment of drawn RCF by YE15 with generated free cash flow and existing cash on the balance
-2015-2017 capex around 10% of revenue
-Unadjusted net debt/EBITDA ratio of 3.6x at YE15
-No investment in spectrum acquisition/renewal

Negative: Future developments that could lead to negative rating action include:
- A failure to generate a positive free cash flow margin - our rating case assumes this to be in the low to mid-single digit range.
- Significant deterioration of operating and financial performance in the Lithuanian and Latvian markets.
- Persistently weakening leverage trend. A material compression of covenants headroom and no sign of the negative trend being addressed would be a risk.
-The decline in available liquidity to below EUR15m, including RCF, without a clear path for improvement may put pressure on ratings.

Positive: Future developments that could lead to positive rating actions include:
- A difficult operating environment and the constraining factors suggest an improvement in the rating is unlikely in the near to medium term.
- Solid improvement in operating performance in Lithuania, ongoing traction in Latvia and an FFO net adjusted leverage of 3.75x or below could potentially support a higher rating.