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Rating Action:

MOODY'S ASSIGNS (P)B1 CORPORATE FAMILY RATING TO HELLAS TELECOMMUNICATIONS II; NEGATIVE OUTLOOK

20 Sep 2005
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.

TRANSACTION SUMMARY

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.

RATING RATIONALE

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 expectations.

CREDIT WEAKNESSES

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 business strategies.

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.

CREDIT STRENGTHS

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 other factors.

STRUCTURAL CONSIDERATIONS

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 notes.

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 family rating.

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.

COMPANY OVERVIEW

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.

London
Jenya Brown
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
David G. Staples
Managing Director
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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