OREANDA-NEWS.  Fitch Ratings has upgraded Luxembourg-based Sunrise Communications Holdings S.A.'s (Sunrise) Long-term Issuer Default Rating (IDR) to 'BB+' from 'BB-' and removed it from Rating Watch Positive (RWP). The Outlook is Stable. The two-notch upgrade reflects the company's reduced leverage following its IPO and successful refinancing.

Fitch has also assigned Sunrise's 2022 senior secured Swiss franc-denominated notes and Switzerland-based Sunrise Communications AG's, Term Loan B, bank debt final ratings of 'BBB-'. These ratings represent a one-notch uplift to Sunrise's IDR of 'BB+'. The increased notching is due to the senior secured nature of the obligations. The new notes, bank debt and proceeds from the IPO were used to reduce and refinance Sunrise's previous debt of CHF2.21bn (CHF 2.84bn including PIK notes) to CHF1.86bn.

Fitch has also withdrawn Mobile Challenger Intermediate Group S.A.'s IDR as the entity's PIK notes have been repaid along with the remainder of Sunrise's refinanced senior and senior secured debt.

A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS
Reduced Leverage Following IPO
Sunrise completed a listing on the Swiss SIX Exchange through a newly formed entity, Sunrise Communication Group AG. The IPO raised primary gross proceeds of CHF1.36bn, which reduce net debt-to-EBITDA to 2.7x from 3.6x in 3Q14 (4.7x including Mobile Challenger's PIK toggle notes), corresponding to funds from operations (FFO) adjusted net leverage of 3.3x. Fitch considers FFO-adjusted leverage of less than 3.5x to be consistent with a 'BB+' rating, given Sunrise's operating profile, proposed shareholder remuneration policy and no material change in the competitive and regulatory environment in Switzerland.

The newly listed entity is committed to a CHF135m dividend in 2016, followed by a pay-out ratio of at least 65% of equity-free cash flow thereafter and will return any excess cash flow above its target capital structure, based on leverage level of 2.5x net debt to EBITDA, to shareholders.

Refinancing of Existing Debt
Sunrise refinanced all of its existing debt of CHF2.94bn in conjunction with the IPO. The debt was reduced and replaced by new bank facilities and senior secured notes. The bank facilities comprise a six-year term loan of CHF1.36bn and a five-year revolving credit facility of CHF200m. The senior secured notes total CHF500m with a tenure of seven years.

Notching of Instruments
The new bank facilities and senior secured notes are secured against the collateral of shares and intra-group receivables of each obligor or material subsidiary. Based on Fitch's rating methodology, the quality of the security allows both debt forms to be rated one notch above Sunrise's 'BB+' IDR. As a result, Fitch has rated the bank facilities and senior secured notes at 'BBB-' to reflect the superior recovery prospects of the share collateral relative to the total amount of debt that secures the obligations.

The collateral of the senior secured notes could be released upon achieving investment grade status but remains in place until it is released by the senior facilities agreement which governs the bank debt. If the collateral is released, Fitch would view these notes as senior unsecured instruments and their rating will be equalised with Sunrise's IDR.

Stable Market Position Likely
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 increased its mobile revenue share to 20.5% from 19.0% over the past five years. Sunrise expects 2014 revenue and adjusted EBITDA to have grown 2%-3% yoy.

Competitive Market Environment
Competition in the Swiss telecoms market remains strong, particularly in the fixed-line segment where Cablecom and Swisscom have become more aggressive - and successful - in marketing their multi-play bundles with ultra-fast broadband speeds. This has placed pressure on Sunrise's fixed-line business, which Fitch views as vulnerable to competition, given its role as an unbundled local loop service provider. We expect fierce competition to continue in this segment over the short to medium term due to high broadband and pay-TV penetration rates as well as customer migration towards higher broadband speeds.

Competition in the mobile segment could also increase with the launch of Cablecom's mobile product and recent change in ownership of Switzerland's third mobile operator, Orange Communications S.A., following its acquisition by NJJ Capital, a vehicle funded by Xavier Niel, the founder of Iliad in France.

Expected Increase in Leverage
Fitch expects leverage over 2016 and 2017 to increase modestly as a result of remaining spectrum payments, increased cash taxes and dividend payments. This will be partly offset by a reduction in capex, following a period of increased investment for network and set-top boxes for its IPTV service.

KEY ASSUMPTIONS
- Annual revenue growth of 1.0% through 2018 reflecting moderate subscriber and ARPU growth in mobile and stabilising trends in fixed line
- EBITDA margins stable at 2014 levels
- Cash capex, excluding spectrum, normalising at around 13% of revenues from 2015
- Dividends of CHF135m in 2016 as announced, thereafter targeting roughly 65% of equity-free cash flow
- Stable operating and regulatory environment

RATING SENSITIVITIES
Positive: Future developments that could, individually or collectively, lead to positive rating action include:
- FFO adjusted net leverage sustainably below 3.0x.
- FFO fixed charge cover sustainably above 3.75x.

Negative: Future developments that could, individually or collectively, lead to negative rating action include:
- FFO adjusted net leverage sustainably above 3.5x.
- FFO fixed charge cover sustainably below 3.25x.
- Loss of service revenue market share and/or expectations of negative FCF, excluding spectrum payments in the next two years.

The rating actions are as follows:

Sunrise Communications Holdings SA
Long-term IDR: upgraded to 'BB+' from 'BB-'; off RWP; Outlook Stable
Senior secured notes due 2022: assigned 'BBB-'

Sunrise Communications AG
Term loan B facility due 2021: assigned 'BBB-'

Fitch has withdrawn the following ratings:

Sunrise Communications Holdings SA
Senior secured RCF due 2016: 'BB'
Senior secured notes due 2017: 'BB'
Senior notes due 2018: 'B'

Mobile Challenger Intermediate Group SA
Long-term IDR: 'B+'
Senior PIK toggle notes due 2019: 'B-'