MOODY'S ASSIGNS (P)Ba2 RATING TO C&M'S PROSPECTIVE BOND ISSUE; OUTLOOK STABLE
Approximately US$550 Million in Debt Securities Affected
Hong Kong, January 10, 2006 -- Moody's Investors Service today assigned a provisional foreign currency
senior unsecured long-term debt rating of (P)Ba2 to the proposed
US$550 million Notes (the Notes) issue, due 2011 and 2016,
of C&M Finance Ltd., backed by C&M Co.,
Ltd. (C&M) and its operating subsidiaries. The proceeds
will be utilised to refinance bank loans and fund potential acquisitions
in the future. At the same time, Moody's assigned a
provisional foreign currency corporate family rating of (P)Ba2 to C&M.
This is the first time that Moody's has assigned ratings to the C&M
Group. The outlook for the ratings is stable.
The securities will be sold in a privately negotiated transaction --
without registration under the Securities Act of 1933 (the Act) --
under circumstances reasonably designed to preclude a distribution thereof
in violation of the Act. The issuance will be designed to permit
resale under Rule 144A.
The ratings are principally supported by C&M's solid operating
profile as either a monopoly or duopoly provider of services in its regions
of operation within the Korean cable TV (CATV) industry, including
a large and established customer base. This situation enables C&M
to achieve strong profit margins that are sustainable and are being translated
to acquired operations. The Korean CATV market displays utility-like
characteristics, commanding a leading position for TV broadcast
distribution in that country.
The ratings benefit from the strong demographic characteristics of the
markets in which C&M operates, primarily in or around Seoul.
Such characteristics correlate to the potential strong demand for its
new product offerings, specifically digital services and high speed
data (HSD). The company enjoys the highest levels of subscription
revenue (ARPU) for a Korean CATV operator, and which are expected
to grow, given recent system upgrades and increasing take up of
HSD services by existing cable subscribers. Its digitalization
process is mostly complete, thanks largely to the concentration
of the subscriber base in and around Seoul. Consequently,
Moody's expects that C&M will demonstrate moderating capex per
subscriber requirements in the near term, bolstering its ability
to generate free cash.
The company is the second largest multi-system cable TV operator
(MSO) in South Korea, and the largest in the greater Seoul metropolitan
area. It has 1.6 million subscribers to its CATV service
as well as over 310,000 ISP subscribers. It operates principally
in the greater Seoul metropolitan area, encompassing Kuyunggi province.
It covers 43% of all Korean households, including those with
the highest average annual household income of US$31,300.
The growth of the company and its current position in the market reflect
positively on the strengths of its Chairman, CEO, and their
C&M's prospective financial profile is one which is well positioned
for its rating category with Adjusted Debt/EBITDA (adjusted for off-balance
sheet liabilities and cash) potentially reducing to roughly 4 times during
the 2006 financial year. There also appears to be good prospects
for this financial profile to continue improving over the next 2-3
Nevertheless, Moody's also notes the ratings reflect the higher
business risk profile of C&M, given it has enjoyed rapid growth
in recent years, both organically and through acquisitions.
This creates integration risk issues. It also creates a risk that
cash may be dissipated on non-accretive acquisitions in the future
and thus whether C&M's will be as successful as it plans in
increasing its cash flows from new and existing customers. Balancing
this, Moody's notes the company has a sound track record in
assimilating acquired operations efficiently.
Moody's also considered risks associated with the potential for
the regulatory environment to evolve in an unfavourable manner,
including a possibility that telecoms may be able to promulgate an attractive
IP-TV service offering. Such a situation could impact demand
for C&M's services if the telecoms are able to secure access
to content, particularly free-to-air TV and programming
from the 2 major multiple program providers (MPPs). Both of these
are necessary and could be challenging to obtain, particularly given
the 2 major MPPs are also CATV System Operators (SO).
Moody's concluded however that such a development is more likely
to be a long term threat and it appears to be less likely to occur in
the next two to four years. There are significant barriers to the
convergence of the telecommunications and media industries, notably
regulatory and legal. In addition, any convergence could
also have benign outcomes for C&M, particularly if it were to
merge with a large telecommunications entity.
Moody's notes that C&M is approximately 66% owned by
Min Joo Lee, its Chairman, and his related parties,
30.5% by Goldman Sachs Principal Investment Area (GSPIA),
and 3.5% by Olympus Capital Holdings Asia. C&M,
like many private companies, has historically had less than robust
corporate governance. This was evidenced during 2005 when there
was a misunderstanding regarding compliance with bank loan covenants,
the matter of which was subsequently resolved.
Actions have been taken to bolster C&M's governance regime in
January 2006 with the launch of the Board Audit committee, the appointment
of 2 independent directors, and appointment of a Compliance Officer.
Moody's also takes some comfort from the presence of GSPIA as it
is expected to provide strength to corporate governance. GSPIA
has 2 board members who together with the 2 independent directors form
a majority on the board, with the other 3 members being Mr Lee and
two executives. In addition, GSPIA can appoint certain key
managers, including the CFO, further enhancing the strength
of the management team.
The capital structure is somewhat complex. The US$ Notes
will be issued by an offshore SPV with proceeds on-lent to individual
SOs within the group. The Notes will enjoy an unlimited guarantee
from C&M the holding company, and more importantly, limited
guarantees from each SO to 130% of their individual loans.
These guarantees rank pari passu with the other senior unsecured creditors
of the SOs. Meanwhile, the Notes covenants, to which
the SOs are party, restrict any ability to offer security to other
lenders. Consequently, there are no material structural or
effective subordination issues for the Note-holders.
The Notes covenants include an allowance for additional debt and this
situation has been factored into the rating. Specifically,
the debt incurrence test allows leverage to a limit of 6x debt to EBITDA,
while there is a carve-out of US$35 million for additional
debt that maybe secured. The restricted payments test allows 50%
of net income to be paid out, assuming the debt incurrence test
Moody's comments that the debt incurrence test is important as it
will limit C&M's ability to undertake additional acquisitions,
particularly if the regulatory restriction on owning SOs -- 20%
of the market coverage -- is either lifted, or removed.
C&M's liquidity profile is adequate. It includes no material
debt maturities in the medium term, while access to committed facilities
enhances working capital management. The company does, however,
face the potential of a material re-financing risk, given
the majority of its debt is represented by the Notes, which will
be bifurcated into 5- and 10-year tranches with bullet maturities.
Moody's would expect C&M to continue to develop its access to
capital in the intervening period, potentially by way of an IPO.
Access to funding in the Korean market is also considered likely,
The ratings outlook is stable, reflecting C&M's solid
operating profile. The ratings may experience upward pressure if
C&M's business profile stabilizes from its period of rapid growth
and it executes on its business plan to enhance subscriber ARPUs and the
EBITDA margins of recently acquired SOs; thereby resulting in improvements
in financial leverage and free cash flow. This may be evidenced
by group EBITDA margins between 45 and 50% on a stable basis,
net adjusted debt/EBITDA between 3 and 4x on a sustainable basis,
and a ratio of net adjusted debt to free cash flow between 10 and 15 times.
On the other hand, the ratings could encounter downward pressure
if C&M continues with ongoing growth over a period of 2 or more years
and proves unable to enhance its ARPUs through transitioning subscribers
to higher value plans, upscale the profitability of acquired SOs,
and/or becomes free cash flow negative. This may be reflected by
EBITDA margins trending below 45% and a ratio of net adjusted debt
to EBITDA approaching 5x.
C&M Co., Ltd., based in Seoul, Korea,
is a leading provider of Cable TV services in that country and an emerging
provider of high speed data services.
Charles F. Macgregor
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Pty Ltd
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100
Senior Vice President
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121