Fitch Rates Cellnex's Bond Final 'BBB-'
The EUR600m of medium-term notes mature in 2022 and have a fixed rate coupon of 3.125%. The notes are pursuant to the company's EUR2bn EMTN Programme and include a change of control provision (linked to a rating downgrade), cross default and negative pledge.
The bonds are rated at the same level as Cellnex's Issuer Default Rating of 'BBB-' as they represent unconditional and senior unsecured obligations of the company.
Cellnex used the proceeds of the issue to refinance part of its existing debt to achieve a longer term average maturity profile. The company's new capital structure has a total of EUR1.1bn of gross debt comprising the EUR600m bond, an increased revolving credit facility (RCF) of EUR300m and a term loan for the remaining amount.
Cellnex is currently managing an increase in its leverage profile following the acquisition of Wind's Italian tower business, Galata in March 2015. The company has a strong and scalable, cash-generative business model that will enable gradual deleveraging. Fitch expects funds from operations (FFO) adjusted net leverage at end-2015 to increase to 5.8x, from 2.8x in 2014, before falling below 5.25x in 2016 and thereafter, depending on the company's dividend policy.
KEY RATING DRIVERS
Long-term Contracts Critical
The ratings are supported by the stability and visibility of Cellnex's revenue streams, which are derived from long-term, CPI-linked contracts of the company's mobile towers portfolio in Spain and Italy and the strong market position of its TV broadcasting infrastructure in Spain.
On a 2015 pro-forma basis for acquisitions, Cellnex derives over 50% of its revenues from its mobile towers business in Spain and Italy and 35% from its broadcasting infrastructure in Spain. The contracts for Cellnex's mobile towers 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 CPI linked and fixed with a high chance of renewal for a further 10 to 15 years on terms that have been predetermined as part of the original contracts. This provides long-term visibility and stability to the company's cash flows.
Cash-Generative Business Model
Fitch estimates that Cellnex will have a pre-dividend free cash flow (FCF) margin of around 22% of revenues in 2016. 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 projects, this is typically deployed with rental sales pre-agreed. Cellnex could further expand its margins, depending on the growth of towers, increase in tenancy ratios and rationalisation of mobile towers.
Mobile Industry Growth Supportive
We believe that mobile operators are likely to continue to increase their dependence on tower providers, given growth in mobile data and the need to meet geographic coverage obligations for LTE. Cellnex and other tower providers enable the co-location of operators on a single tower. This creates an alternative to network-sharing, helping mobile operators to increase capacity and improve coverage while reducing costs. The greatest risk to this growth is market consolidation of mobile network operators, which could reduce demand for mobile towers. Cellnex's existing business however, would be protected by contract in a consolidation scenario.
Risks from TV Broadcasting
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 this risk materialising in Spain.
Eighty-two percent of Spanish households only view TV via digital terrestrial broadcasting - one of the highest proportions in Europe. Cellnex has a leading market position in the sector with a 87% market share on a combined national and regional broadcast basis.
Operating Leases Matched by Revenue
Cellnex has significant operating leases, which contributes EUR1bn to Fitch's adjusted net debt. The 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 and the backlog of revenue significantly greater than the total costs of the leases.
Managing an Increase in Leverage
Cellnex recently acquired 90% of Wind's mobile telecom towers business Galata for EUR693m. Wind has retained a 10% stake in the business and has a put option that can be exercised between July 2016 and July 2020. The acquisition increased both geographic and customer diversification for Cellnex but also increased gross debt to EUR1bn, from EUR420m. This will raise FFO net leverage to an estimated 5.8x in 2015 from 2.8x in 2014. However, Fitch believes that Cellnex is likely to deleverage at a rate of 0.4x to 0.5x per year, due to its strong cash generation, assuming a conservative dividend policy.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Cellnex include:
-A pro forma revenue contribution of around EUR200m in 2015 from acquisitions in Italy offset by a 2.6% fall in Spain, driven by the full year effects of channel shutdown within the broadcasting segment.
-Revenue growth of 15% in FY16 due to full-year acquisition benefits and recovery of Spanish TV broadcasting before stabilising at 2-3% annual growth thereafter.
-EBITDA margin of 37% in 2015 due to dilutive effect of Galata acquisition, increasing to 40% by 2018.
-Discretionary expansion capex of around 8 percentage points which, alongside maintenance capex, increases total non-M&A capex to 11%-12% of revenues annually. No further M&A expenditure is assumed.
-Dividend pay-out around 20% of recurring leveraged FCF per year.
-Wind exercises its EUR77m Galata put option in 2016 at first available opportunity.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to an upgrade 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 3.0x (2014: 5.0)
Future developments that may, individually or collectively, lead to negative rating action include:
--Expectation that FFO adjusted net leverage does not fall to 5.0x in two years and remains above 5.0x on a sustained basis.
-Fixed charge cover remaining sustainably below 2.5x.
-FCF margins below 10% until 2017.
-A significant deterioration in operating environment, either due to consolidation within the mobile market or market trends in digital terrestrial TV leading to a material reduction in revenue.
Комментарии