Credit Opinion: TDC A/S

Transcription

1 Credit Opinion: TDC A/S Global Credit Research - 30 Apr 2014 Copenhagen, Denmark Ratings Category Outlook Issuer Rating Sr Sec Bank Credit Facility Senior Unsecured Moody's Rating Stable Baa2 Baa2 Baa2 Contacts Analyst Phone Carlos Winzer/Madrid Ivan Palacios/Madrid David G. Staples/DIFC - Dubai Key Indicators TDC A/S EBITDA Margin % 43.0% 41.8% 44.9% 41.2% 41.2% 35.7% Debt / EBITDA 2.8x 2.7x 2.4x 3.8x 2.8x 3.8x FCF / Debt 1.3% 2.5% 7.0% -3.0% 17.2% 5.5% RCF / Debt 17.0% 16.8% 21.5% 6.7% 30.4% 17.4% (FFO + Interest Expense) / Interest Expense 6.4x 6.0x 4.8x 5.0x 5.0x 2.9x (EBITDA-CAPEX) / Interest Expense 4.1x 3.8x 3.6x 2.3x 2.8x 1.6x All ratios are calculated using Moody's standard accounting adjustments Source: Company reports and Moody's estimates Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide. Opinion Rating Drivers - Efficient operator with high margins, strong competitive positions and resilient business model - TDC is one of the few telecoms operators to retain its CATV business together with its telecom business, which enhances its competitive position through its differentiated product offering - Low international diversification strategy - High dividend payout policy although within a fairly prudent financial strategy that includes a maximum leverage of reported net debt/ebitda of 2.2x. - Good liquidity risk management with no bond maturities before 2015 Corporate Profile

2 TDC A/S (Baa2 stable) is the principal provider of fixed and mobile voice communications, internet broadband data services and cable TV offerings in Denmark. The company also provides telecoms services to business customers throughout the Nordic region. TDC's revenues for the twelve months to 31 December 2012 amounted to some DKK26.1 billion (approximately EUR3.5 billion) and EBITDA of DKK10.3 billion (around EUR1.4 billion). TDC is organised into five main lines of business: (1) Consumer (approximately 33% of revenues for the twelve months to 31 December 2012, excluding intercompany eliminations); (2) Business (25%); (3) Nordic (17%); (4) Wholesale (7%); and (5) CATV (16%). The company's main market is Denmark, although it also has operations in Norway, Sweden and Finland through its subsidiary TDC Nordic. Kohlberg Kravis Roberts NTC S.à.r.l. owns a % of the total share capital and % of the total voting rights of TDC. Rating Rationale TDC's ratings reflect (1) the strength of the company's operations in Denmark (strong market shares including more than 42% in the mobile segment) and the Nordic countries; (2) a clear strategy recently revised and focused on enhancing network quality to deliver product bundles in support of revenues; (3) a track record of delivering stated results; (4) the quality of management and business model; (5) the strategic fit and importance of all of TDC's subsidiaries, particularly its CATV business (YouSee), which differentiates the company from its European peers; (6) financial strength, which is underpinned by expected substantial operating cash flow generation; and (7) appropriate liquidity risk management. The rating also reflects TDC's low international diversification and relatively small size. In addition, the ratings reflect our expectation that the company will adhere to its public commitment to maintain maximum leverage - measured as reported net debt/ebitda - of 2.2x (approximately equivalent to a Moody'sadjusted gross ratio of 2.7x). Furthermore, the ratings reflect TDC's significant shareholder distribution policy. DETAILED RATING CONSIDERATIONS STRONG COMPETITIVE POSITION IN DENMARK; CABLE TV BUSINESS AS A STRATEGIC ASSET Through its multibrand strategy, TDC has retained strong market shares as a leading telecom operator in Denmark providing traditional fixed lines, internet and mobile services. It is the largest provider of cable services in Denmark under its brand YouSee. Differentiating itself from its European peers, TDC is one of few telecom operators in Europe with a cable TV business, as European regulators (within the EU) have generally forced telecoms to dispose of their cable businesses. As a result, TDC has a good competitive position, as we note that a growing threat for European broadband/fibre operators are other cable operators. TDC has the ability to bundle high-quality services with growing demand of wireless internet (tablets and smartphones). Through its low-cost and premium brands, TDC has been able to broadly sustain market shares. As of 31 December 2012, the company reported that it had a 81% market share in landline telephony, a 60% broadband market share, a 52% market share in TV (combining CATV, PayTV and IPTV), and a 42% market share in mobile voice services, being the market leader in all six segments in Denmark. RELATIVELY SMALL SIZE COMPANY WITH LOW INTERNATIONAL DIVERSIFICATION As of 31 December 2012, TDC generated last-12-months revenues of DKK26.1 billion (approximately EUR3.5 billion), solely from Denmark and the Nordic regions. We expect the company to experience slightly declining revenues for 2013 in Denmark. However, TDC may offset the further contraction in its domestic fixed voice business by growth in mobile, TV and the Nordic business. From 2014 onwards, we expect TDC's revenues to be stable or slightly increasing as the company benefits from its integrated strategy, which includes pushing enhanced product bundles and enhanced tiered pricing schemes. We expect the company to enjoy growth in the TV and Nordic segments, in line with recent years. TDC has fully divested from non-nordic international assets focusing on the Nordic region, its core business. We believe TDC will remain a strong fixed and mobile operator in Denmark, which will continue to generate the vast majority of the company's operating cash flow. TDC's international business accounted for approximately 17% of its revenues and around 7% of its reported EBITDA for the twelve months to 31 December We would expect these businesses to grow in the single-digit range in percentage terms while EBITDA margins will likely improve to around mid-teens. We do not expect management to grow these businesses other than organically and through small bolt-on acquisitions, such as that of Onfone in May 2011for DKK288 million (approximately EUR38.6 million), to further improve its position in the mobile market. We believe that TDC is a potential candidate for a takeover, given (1) its small size; (2) the fact that the Danish

3 government does not own a stake in the company; and (3) that the company operates very efficiently, with strong cash flow from operations after its recent restructuring. MODERATE TECHNOLOGY RISK We believe that technology risk for TDC is moderate. The combination of a highly advanced infrastructure, including cable ownership, provides TDC with strong network platforms both in fixed line and mobile. Over the past three years, TDC's capital expenditure (capex)/revenues ratio has been around 13% to 14% and we expect it to slightly increase over the next few years. Our expectation is that TDC's annual capex level will increase by DKK0.2 billion (around EUR27 million) to some DKK3.7 billion (approximately EUR500 million) in 2013 and will be sustained over the next three years. The step-up in capex will primarily be applied to TDC's high-speed broadband strategy and 4G rollout. The fact that TDC runs both a CATV and a telecom network simultaneously differentiates it from its peers in the industry, enabling it to segment and select the market, offering different technologies depending on demand and competition. In the mobile segment, we expect an acceleration of the 4G rollout to support increasing smartphone penetration and higher network usage. As of year-end 2012, TDC reported more than 40% 4G population coverage and we expect it to reach almost 100% by 2015 in Denmark. This will be an important contributor to revenue stability in TDC's mobile segment as long as it comes with better market segmentation and innovative tiered pricing schemes. SOPHISTICATED REGULATORY ENVIRONMENT AFFECTED BY CONTINUED REDUCTION IN RATES We consider the regulatory environment in which TDC operates to be sophisticated, with an established track record, particularly in Denmark, which was one of the first European countries to liberalise its telecommunications market. Despite the fact that the Danish regulatory framework is currently undergoing a revision, we do not expect the outcome to significantly affect TDC. For example, there will be further reductions in data roaming, a review of the content and scope of the price control obligation and the possibility of a reintroduction of a price cap on some of TDC's services. We have also factored into TDC's rating the decrease in mobile termination rates (MTRs) that took place in Denmark in March 2012 (to DKK0.23 from DKK0.33) as well as the further cut incurred in January However, given the price reductions already implemented in recent years, we do not expect any further change in MTRs to materially affect TDC's financial performance. STRONG OPERATING PERFORMANCE; RESILIENT TO GLOBAL NEGATIVE TREND TDC has managed to largely resist the global negative trend in revenues throughout the sector in Europe, maintaining only slight declines (-0.7%) in revenues in the twelve months to 31 December We believe that the company will be able to continue to offset much of the impact of possible further price erosion by the continued focus on (1) efficiency improvements (for the twelve months of 2012, the company reduced its operating expenditure by approximately 5.6% compared with twelve months of 2011); and (2) differentiation through service quality and breadth of product offering, strengthening the company's position in the domestic pay-tv markets. We note that the restructuring processes implemented by TDC over the past few years, including the disposal of assets and subsidiaries (Sunrise) as well the process re-engineering and employee reductions, have already enabled the company to achieve a reported EBITDA margin of around 40%, which we expect will be sustained. Further cost reductions and strategic initiatives may continue to support free cash flow (FCF) generation and improvement in financial metrics, despite a smooth increase in capex. COMMITTMENT TO AN INVESTMENT-GRADE RATING SUPPORTED BY LIMITED LEVERAGE TDC has a strong track record of prepaying debt with the use of cash proceeds from asset sales and cash flow generation. Since the LBO by NTC Holding G. P. & Cie S.C.A. and related parties, the company has steadily strengthened its financial metrics by maintaining a disciplined approach to M&A and focusing on strategy execution, in-market consolidation and the divestment of non-core assets. TDC is committed to a maximum reported net debt/ebitda ratio of 2.2x (approximately equivalent to Moody'sadjusted gross debt/ EBITDA of 2.7x) on average over the financial year and a high payout ratio target of 90% of FCF post special items (equity FCF) as defined by the company. This will constrain management's ability to strengthen its debt protection ratios, mainly FCF/debt and retained cash flow (RCF)/debt. However, we expect TDC's low RCF and FCF levels to be partially offset by (1) the company's strong ongoing commitment to a financial strategy that includes a public commitment to preserving an investment-grade rating and the committed

4 maximum leverage; (2) the fact that TDC will make limited use of its financial strength, noting the company's intention to comply with its leverage target and that any potential acquisitions will be bolt-on in nature and undertaken within guidance metrics for the current rating; and (3) the strong liquidity that we expect the company to preserve at all times to avoid any funding constraints. Other Considerations Methodology grid: the Baa3 grid outcome reflects the combination of TDC's strong competitive position and high EBITDA margin, which compensate for its weaker cash flow metrics. The difference between the rating and the grid output reflects our expectation that TDC will gradually improve its financial metrics supported by the strength of TDC's position in the Danish market, including its resilient business model and by the fact that the company has a CATV operation that complements its telecom network. Liquidity We expect TDC's liquidity profile to remain solid over the next months. We believe that internal liquidity sources should enable the company to cover its debt maturities and other expected cash demands over this period. In addition, we expect the company's internal cash flow generation to exceed its operating needs, capex and regular dividend payments of 90% of FCF post special items. As of December 2012, TDC had around DKK973 million (approximately EUR130 million) in cash and cash equivalents. In addition, the company had credit facilities totalling EUR500 million (around DKK3.7 billion), maturing in 2016 and EUR200 million (approximately DKK1.5 billion) maturing in TDC has no bond maturities before 2015, when the company has just over EUR1 billion (around DKK7.45 billion) coming due, for which we expect management to start preparing refinancing over the next 18 months. Rating Outlook The stable outlook reflects our expectation that TDC will maintain strong cash flow generation after capex through a combination of operating stability, efficiency gains and capex optimisation. The outlook also reflects our expectation that TDC will retain financial metrics that are commensurate with a Baa2 rating, including an adjusted RCF/gross debt ratio trending towards 20% and a gross adjusted debt/ebitda ratio of below 2.5x. What Could Change the Rating - Up Positive rating pressure could occur if TDC's adjusted debt/ebitda approaches 2.0x and RCF/debt exceeds 25% on a sustainable basis. What Could Change the Rating - Down Negative pressure could be exerted on the ratings if TDC's financial metrics deteriorates as a result of weak operating performance or an extraordinary use of funding that translates into adjusted debt/ebitda exceeding 2.5x or adjusted RCF/debt consistently below 17%, with unclear signs of improvement. Rating Factors TDC A/S Global Telecommunications Industry [1] FYE [2]Moody's month Foward 2013 View as of April 2014 Factor 1: Scale, business model & competitive environment Measure Score Measure Score a) Scale (12%) $4.4 bn Ba $4.0-$4.5 bn Ba b) Bus. model, comp. Env. & tech. positioning A A (15%) Factor 2: Operating environment a) Regulatory and political (8%) Baa Baa b) Market share (8%) A A Factor 3: Financial policy a) Management's financial policy (5%) Baa Baa

5 Factor 4: Operating performance a) EBITDA Margin (5%) 43.1% Aa 44%-45% Aa Factor 5: Financial Strength a) Total Debt / EBITDA (9%) 2.75x Baa 2.6x-2.75x Baa b) FCF / Adjusted Debt (7%) 1.3% Caa <4.0% Caa c) RCF / Adjusted Debt (10%) 17.0% B 17.5%-18.5% B d) (FFO + Interest Expense) / Gross Interest 6.4x Baa 6.0x-7.0x Baa Expense (13%) e) (EBITDA - Capex) / Gross Interest 4.1x Baa 4.0x-4.5x Baa Expense (8%) Rating: a) Indicated rating from grid Baa3 Baa3 b) Actual rating assigned Baa2 Baa2 [1] All ratios are calculated using Moody's standard accounting adjustments [2] This represents Moody's forward view, not the view from the issuer; and unless noted in the text; does not incorporate significant acquisitions and divestures. Source: Moody's Financial Metrics 2014 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATION") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY'S CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL

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