MOODY'S ASSIGNS (P)B1 CORPORATE FAMILY RATING TO HELLAS TELECOMMUNICATIONS II; NEGATIVE OUTLOOK
Approximately EUR1,280 million in debt instruments affected
London, 20 September 2005 -- Moody's Investors Service today assigned a provisional (P)B1 corporate
family rating to Hellas Telecommunications II S.a.r.l.
("Hellas II"), an indirect holding company of TIM Hellas
Telecommunications S.A. ("TIM Hellas" or "the
company"). Moody's also assigned a (P)B1 rating to
the proposed issuance of senior secured notes in the amount of EUR925
million due 2012 to be issued by Hellas Telecommunications (Luxembourg)
V and a (P)B3 rating to the proposed issuance of senior unsecured notes
in the amount of EUR355 million due 2013 to be issued by Hellas Telecommunications
(Luxembourg) III. The outlook on the ratings is negative.
Moody's issues provisional ratings in advance of the final sale
of securities, and these ratings only represent Moody's preliminary
opinion. Upon a conclusive review of the transaction and associated
documentation, Moody's will endeavour to assign definitive
ratings to the securities. A definitive rating may differ from
a provisional rating.
TIM Hellas plans to raise EUR925 million in senior secured bonds and EUR355
million in senior unsecured bonds to refinance senior secured and unsecured
bridge facilities put in place at the time of the acquisition of 80.87%
of the share capital of TIM International N.V. by two private
equity firms -- Apax Partners and Texas Pacific Group (collectively
"the Sponsors") -- in June 2005. Part of the net
proceeds (c. EUR277.5 million) will be held in an escrow
account to finance a further buy-out of the remaining minority
shareholders. Additionally, Hellas Telecommunications Finance
will issue Paid-in-Kind ("PIK") notes in the
amount of EUR110 million to partially refinance the existing PIK bridge
facility. The obligor for the PIK notes will be outside the restricted
group. TIM Hellas also has access to a EUR250 million revolving
credit facility which is granted to Hellas Telecommunications (Luxembourg)
V. The facility is expected to be reduced to EUR200 million at
the close of the merger of TIM Hellas and its acquisition vehicle.
The Sponsors will make an equity contribution into the restricted group
through a subordinated shareholder funding in the amount of EUR360 million,
which will represent a combination of EUR50 million of convertible preferred
equity certificates, EUR200 million of preferred equity certificates
and EUR110 million through the issuance of the PIK note. In its
analysis of the capital structure, Moody's takes into account
the deeply subordinated nature of the shareholder funding as enshrined
in the draft intercreditor agreement.
The senior secured notes will be guaranteed on a senior secured basis
by Hellas II and some of its subsidiaries. Following the merger
of TIM Hellas (the operating company) and its acquisition vehicle,
Troy GAC Telecommunications S.A., the notes will additionally
be guaranteed by TIM Hellas; prior to the merger, TIM Hellas'
guarantee will extend to EUR166 million (of the EUR925 million senior
secured notes) on-lent to repay the existing third-party
debt by TIM Hellas. The senior secured notes and the senior secured
guarantees will benefit, inter alia, from the security over
substantially all the assets of the intermediate holding companies and
TIM Hellas, with the liens being junior to the liens securing the
revolving credit facility.
The senior unsecured notes will be guaranteed on a senior subordinated
basis by Hellas II and some of its subsidiaries. At the close of
the transaction, the senior unsecured notes will not be guaranteed
by TIM Hellas, which will guarantee the notes only after the aforementioned
merger. The senior unsecured notes and the guarantees will be secured
by the liens ranking junior to the liens securing the revolving credit
facility and the senior secured notes.
At present, the Sponsors own 80.87% of share capital
of TIM Hellas and intend to buy out the minority shareholders through
a cash-out merger, with an expectation to finalise the buy-out
by November 2005. In the event that the Sponsors do not receive
necessary regulatory approvals to proceed with the cash-out merger,
they will implement a fallback plan, in which case the Sponsors
may not own 100% of the share capital of TIM Hellas. The
rating relies on Moody's expectation that the cash-out merger
is reasonably likely to occur, in which case TIM Hellas, the
operating company, will ultimately guarantee the notes immediately
after the cash-out merger. Moody's will assess any
change in the buy-out process of the minority shareholders that
could have an adverse impact on the bondholder protection.
The (P)B1 corporate family rating reflects (i) the company's highly
leveraged capital structure at c. 5.5x Adjusted Total debt
to EBITDAR excluding PIK and c. 5.9x including PIK on a
pro-forma basis; (ii) TIM Hellas' market position as
a third mobile operator in the Greek market, with two strong competitors
-- Vodafone Greece and Cellular Operating System of Mobile Communications
S.A. ("Cosmote") -- and its high mobile
penetration; (iii) the company's downward trend in its recent
operating performance and the challenges it faces in retaining its market
share and containing high churn rates; (iv) regulatory pressure resulting
in a further reduction in interconnect rates, which will negatively
affect the company's revenue in the near term; (v) the relatively
new management team, albeit with a strong expertise in the Greek
telecommunications market; and (vi) uncertainties associated with
the potential acquisition of Q-Telecom.
More positively, the corporate family rating reflects (i) the incremental
growth opportunities available to the company thanks to real penetration
of less than 100% and anticipated usage growth; (ii) its historically
stable ARPU; (iii) the moderate capital expenditure requirements
going forwards due to the full network build-out already achieved;
(iv) solid cash flow generation; and (v) the potential operational
benefits from the ongoing association with TIM Italia S.p.A.
The company is weakly positioned in its rating category. The negative
outlook on the ratings reflects the company's track record of weak
operational performance reflected in part by the trend of continued market
share losses as well as execution risk associated with the minority buy-out.
If it were to achieve a successful and sustainable operational turnaround,
the rating outlook could be changed to stable over the medium term.
Additionally, in the event that the acquisition of Q-Telecom
proceeds, Moody's would assess the impact of the transaction
on TIM Hellas' operational and financial profile relative to current
The company is highly leveraged, with total adjusted debt to EBITDA
of c. 5.5x excluding PIK and c. 5.9x including
PIK on a pro-forma basis. The ratio does not factor in any
potential drawdowns under the revolving credit facility. Taking
into consideration the mature nature of the mobile market in Greece and,
as a result, the moderate growth opportunities as well as the company's
recent challenges in increasing its revenue, the corporate family
rating reflects expectations of a gradual de-leveraging trajectory
over the medium term.
TIM Hellas is the third largest mobile operator in the market with two
strong competitors, Vodafone Greece and Cosmote. Vodafone
Greece benefits from the high level of brand awareness and global advertising
of Vodafone Group plc, whilst Cosmote benefits from its ownership
by Hellenic Telecommunications Organisation S.A. ("OTE"),
the incumbent fixed-line operator in Greece. Additionally,
in the pre-paid market the company competes with Q-Telecom,
which targets the low-value market segment through its low-cost
proposition in both voice and SMS. As of 30 June 2005, the
respective market shares of the Greek mobile operators were: Cosmote
-- 37.6%, Vodafone Greece -- 35.8%,
TIM Hellas 19.4% and Q-Telecom -- 7.3%.
Moody's also notes that the Greek mobile market is highly penetrated,
with official penetration of over 100%. However, the
company concedes that real mobile penetration is lower -- at below
80% due to a number of inactive subscribers thus providing for
further growth opportunities in subscriber numbers. Although Moody's
recognises the incremental opportunities for further growth in the market,
the rating agency cautions that the company's revenue and EBITDA
growth trajectory will be constrained by the competitive and saturated
nature of the Greek mobile market.
The negative outlook on the ratings reflects the company's recent
weak operating performance and a continued loss of its market share.
Revenues decreased by 3.3% to EUR395 million in the six
months ended 30 June 2005, from EUR408 million in the six months
ended 30 June 2004. This was primarily a result of a decrease in
airtime revenues due to a change in interconnect rates and a decrease
in prepaid customers as TIM Hellas continued to lose market share to its
competitors. TIM Hellas' market share has been falling over
a number of years, with a recent decline from 21% as of 31
December 2004 to approx. 19% as of 30 June 2005.
The revenue reduction fed through to EBITDA numbers, which declined
by EUR15 million to EUR104 million in H1 2005.
To retain its market share, TIM Hellas has to address its high churn
rates. In H1 2005, the blended churn rate was 45.8%
with a pre-paid churn rate of 51.7% and a post-paid
churn rate of 34.9%. The high churn rate is somewhat
mitigated by a relatively short pay-back on acquired subscribers.
TIM Hellas' revenue and EBITDA were also affected by new interconnect
rates introduced in October 2004 with a reduction from EUR0.18
/ min to EUR0.15 /min. With Greece aiming to align its telecommunications
industry regulation with the EU standards, new legislation is expected
to be introduced later this year which will stipulate a further reduction
in the interconnect rates to bring them in line with the EU average.
This reduction in the interconnect rates, particularly fixed-to-mobile,
will negatively affect the company's revenue and EBITDA.
Additionally, TIM Hellas has to comply with recently introduced
regulation requiring it to obtain environmental assessments and local
permits for its antennas. At present, the company is not
in compliance with this requirement for the majority of its antennas,
which could result in their removal from the sites. Although Moody's
believes that the company will ensure receipt of the relevant permits,
any material disruption to the company's network operations due
to the antennas' removal would exert downward pressure on the rating.
TIM Hellas has recently recruited senior managers from its bigger rivals
-- Vodafone Greece and OTE. Whilst they have significant experience
in the Greek telecommunications market, they are new to TIM Hellas.
This, in combination with the operational challenges the company
faces, adds to the execution risk related to the company's
TIM Hellas has publicly indicated that its Sponsors are in negotiations
with Info-Quest S.A. to acquire Q-Telecom,
a fourth mobile operator in Greece, for a consideration of approx.
EUR230-270 million. Whilst Moody's recognises potential
benefits associated with a reduction in competitive pressure, the
rating agency will further evaluate any impact of this acquisition on
TIM Hellas' business and financial risk profile in the event that
the acquisition materialises. However, the (P)B1 corporate
family rating takes into account the event risk as well as execution and
integration risks associated with the contemplated acquisition.
The rating relies on Moody's expectation that the funding of the
acquisition, with a mix of debt and equity as indicated in the draft
Offering Memorandum, would not have a material impact on TIM Hellas'
leverage profile. Furthermore, it is also assumed that any
form of potential legal integration of Q-Telecom into the corporate
structure of TIM Hellas would not reduce the bondholder protection in
terms of the security package and the relevant guarantees.
The (P)B1 corporate family rating takes into account the incremental growth
opportunities available to the company thanks to real mobile penetration
of less than 100% and an anticipated increase in usage.
TIM Hellas has recorded an increase in Minutes of Use for both pre-paid
and post paid-subscribers, which has supported an increase
in ARPU for both segments. However, it should be noted that
the increase in usage can largely be attributed to new promotional campaigns,
particularly in the pre-paid segment.
Despite TIM Hellas' operational challenges, the company has
managed to maintain ARPU at a relatively stable level. Due to the
recent increase in usage, ARPU rose modestly for both segments.
Another positive factor that supports the corporate family rating is the
company's moderate capital expenditure going forwards. TIM
Hellas' GSM network is largely complete (97.75% population
coverage as of December 2004), and future capital expenditures will
be limited to investments in reducing the gap with its competitors and
improving its comparative network quality. In addition, TIM
Hellas needs to achieve 50% UMTS network coverage by the end of
2006 (27.4% as of December 2004). The capex-to-sales
ratio is expected to be below 15% over the medium term.
Due to its relatively mature business model, the company generates
positive free cash flow. The rating relies on the expectation that
the company will continue to generate sufficient amount of cash flow to
service its substantially increased debt service payments and capital
expenditure whilst remaining free cash flow positive going forwards.
Additionally, the rating factors in the company's ongoing
association with TIM Italia through a series of agreements relating to
branding, technology and purchasing. TIM Hellas will continue
to benefit from using "TIM" brand, although the agreement
to use the name expires in 2009. The company will continue to use
TIM Italia's software for its pre-paid platform and will
be able to benefit from synergies in handset procurement policies amongst
Moody's notes the complex nature of the envisaged capital structure,
which features some instruments that are not necessarily common to European
high-yield issuance. The (P)B1 corporate family rating takes
into account the issuance of the PIK notes in the amount of EUR110 million,
resulting in a ratio of Adjusted Total Debt to EBITDAR of 5.9x
on a pro-forma basis. At the same time, the rating
agency acknowledges that the PIK notes are issued outside the restricted
group and that their proceeds are downstreamed into the restricted group
in the form of preferred equity certificates. As a result,
PIK notes do not have a debt-like claim into the restricted group
and are entitled to receive cash interest payments only within the restricted
payments test of 50% of the net income of the group under the draft
terms and conditions of the notes.
The (P)B1 rating on the senior secured bonds reflects their senior position
in the capital structure relative to the senior unsecured notes.
The rating also takes into account the fact that the secured notes rank
junior in terms of their security package and payment priority in insolvency
to the revolving credit facility and hedging debt. This is,
however, mitigated by the relatively moderate amount which the company
could raise under the revolving facility -- up to EUR250 million.
The (P)B1 rating on the notes is further supported by the company's
intention to reduce the available amount under the facility to EUR200
million after the merger of TIM Hellas and Troy GAC. Additionally
Moody's notes that the company may raise up to one third of its
overall bond funding in US Dollars (up to EUR400 million equivalent) in
which case it intends to hedge the obligation against foreign exchange
risk. As per the draft intercreditor agreement, any hedging
debt will rank pari-passu with the revolving credit facility and
ahead of the senior secured notes. Therefore, in the event
hedging debt is in the money, that amount will rank ahead of the
The (P)B3 rating on the senior unsecured notes reflects their contractual
subordination to the material amount of the senior secured debt.
The Sponsors will fund their equity contribution into the restricted group
through preferred equity certificates ("PECs") and convertible
preferred equity certificates ("CPECs") in the total amount
of EUR250 million. Moody's understands that these instruments
are deeply subordinated to any third-party debt including the senior
secured and senior unsecured notes as provided in the draft intercreditor
agreement. In the event that the PEC / CPEC instruments fail to
comply with the equity-like characteristics as currently factored
into the rating, Moody's would need to revise the company's
debt profile with its leverage increasing to 6.9x Adjusted Total
Debt to EBITDA, which would exert downward pressure on the corporate
The assigned ratings assume that there will be no material variations
to the draft legal documentation reviewed by Moody's and that these
agreements are legally valid, binding and enforceable.
Headquartered in Athens, Greece, TIM Hellas is the third largest
mobile operator in Greece, with a market share of approximately
19% (2.26 million subscribers) as of 30 June 2005.
In H1 2005, the company generated EUR394.7 million of revenue
and EUR112.3 million of EBITDA.
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
David G. Staples
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454