London, 07 February 2020 -- Moody's Investors Service, ("Moody's") has
today changed the outlook on British Telecommunications Plc (BT or the
company) and EE Limited to negative from stable. Concurrently Moody's
has affirmed British Telecommunications Plc's Baa2 senior unsecured
and issuer ratings, the (P)Baa2 MTN programme and senior unsecured
shelf rating as well as the Prime-2 short-term rating and
EE Limited's Baa2 issuer rating.
RATINGS RATIONALE
"The change of outlook to negative reflects (1) Moody's forecasts
for BT's revenues to remain under pressure in fiscal year (FY) ending
31 March 2020 and FY 2021 driven by intense competition and regulatory
changes affecting the Consumer division and the structural decline of
the company's Enterprise segment, (2) the rating agency's
expectation for adjusted gross leverage (as adjusted by Moody's
mainly for the pension deficit) to remain above the triggers set for a
Baa2 rating at 3.5x over the next two years due to the aforementioned
pressure on revenues and the upcoming spectrum auction, and (3)
the execution risk related to a potential acceleration of the fibre rollout
in terms of costs and capital expenditures although Moody's considers
that increased investment is important to enhance the company's
product offering and partly fend off increasing competition from alternative
network providers", says Sebastien Cieniewski, Moody's
lead analyst for BT.
These weaknesses are mitigated by (1) BT's strong business profile
as the only integrated player in the UK telecom market which could allow
the company to accelerate a convergent strategy in line with a number
of European peers, (2) the options available to the company to fund
an acceleration of fibre deployment, including a dividend cut and
the issuance of hybrid instruments among others, in order to contain
leverage.
In the first nine months of FY 2020 (nine-month period ending 31
December 2019), BT experienced a decrease in adjusted revenues and
adjusted EBITDA (as reported by the company) of 2% and 3%,
respectively. This decline was stronger in Q3 2020 only at 3%
and 4%, respectively. Moody's expects revenues
to remain under pressure in FY 2020 and FY 2021 declining by 1-2%
year-on-year driven by continued decline in Consumer,
Enterprise, and Global while Openreach should stabilize.
The Consumer division will be negatively impacted by the intensity of
competition in the UK telecom market as well as regulatory changes,
including the so-called loyalty penalty which the rating agency
expects to increase churn and maintain a deflationary trend on prices.
The price pressure is partly offset by the first CPI-linked price
rises on BT brand broadband products for contracts signed from January
2019 onwards. The Enterprise and Global divisions will continue
to experience a structural decline owing to a decrease in voice revenues
and legacy portfolios, respectively. In Moody's view,
this pressure on revenues partly mitigated by cost savings should result
in a moderate decline in EBITDA over the period.
The negative top line and EBITDA trend will maintain adjusted gross leverage
at above the trigger of 3.5x set for a Baa2 rating. Leverage
was 3.6x as of the last twelve months to 30 September 2019 and
Moody's forecasts this ratio to remain at 3.6x to 3.7x
in FY 2020 and FY 2021 (including the impact from the implementation of
IFRS 16 estimated at 0.1-0.2x which has been looked
through by Moody's). The lack of de-leveraging also
reflects the company's weak free cash flow (FCF) generation and
spend related to the upcoming spectrum auction. In a lower interest
rate environment, Moody's expects that BT's pension
deficit will remain high despite the company's contributions.
In January 2020, OFCOM published its Wholesale Fixed Telecoms Market
Review. Moody's considers that the plan laid out by the regulator
to be implemented from April 2021 after a period of consultation includes
incentives for BT to accelerate the rollout of fibre-to-the-premise
(FTTP). Previously the company stated that it could accelerate
the fibre deployment to 15 million premises by mid-2020's
if sufficient "enablers" were put in place with the government
and OFCOM from a target of 4 million by March 2021. Such a large
rollout implies some execution risk, including risk of labour shortage,
and requires significant additional funding. The rating agency
considers that the company will evaluate different options to fund this
additional capital expenditures related to a potential accelerated rollout
of fibre, including debt, a dividend cut, capital reprioritization,
and hybrid securities issuance, among others.
Whilst environmental, social, and governance risks are not
meaningful for this rating action, Moody's notes that BT does
not have clearly defined metrics in terms of financial policy.
BT's liquidity is supported by cash and a current investment balance
of GBP4.2 billion and an undrawn committed credit facility
of GBP2.1 billion as of 30 September 2019. The bank
facility matures in September 2021 and does not contain repeating material
adverse change clauses or financial covenants.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook reflects the projected continued pressure on BT's
top line over the next 18 to 24 months which should translate into a marginally
declining to flat EBITDA and adjusted leverage remaining at above 3.5x.
The outlook could be stabilized if (1) BT's EBITDA improves driven
by improved top line trend and cost savings, (2) leverage decreases
to below 3.5x, and (3) a potential acceleration of fibre
rollout does not put additional pressure on free cash flow and leverage.
WHAT COULD CHANGE THE RATING UP/DOWN
Upward pressure on the rating could arise if underlying operating performance
and cash flow generation substantially improves with growing revenues
and stronger key performance indicators (KPI) trends leading to a sustainable
EBITDA growth trajectory, coupled with greater visibility in capital
spending. Credit metrics that would support a rating upgrade include
RCF/adjusted net debt sustainably above 22% and adjusted debt/EBITDA
not exceeding 2.8x on a sustained basis.
Downward pressure on the rating could arise if operating performance remains
weaker than expected, or the risks arising from the pension deficit
significantly increases as a result of a widening in the deficit or actions
that could be detrimental for bondholders, e.g. material
subordination risks. Credit metrics that would support a rating
downgrade include RCF/adjusted net debt sustainably falling below 18%
and adjusted debt/EBITDA remaining above 3.5x on a sustained basis.
LIST OF AFFECTED RATINGS:
Affirmations:
..Issuer: British Telecommunications Plc
.... ST Issuer Rating, Affirmed P-2
.... LT Issuer Rating, Affirmed Baa2
....Senior Unsecured Medium-Term Note
Program, Affirmed (P)Baa2
....Senior Unsecured Regular Bond/Debenture,
Affirmed Baa2
....Senior Unsecured Shelf, Affirmed
(P)Baa2
..Issuer: EE Limited
.... Issuer Rating, Affirmed Baa2
Outlook Actions:
..Issuer: British Telecommunications Plc
....Outlook, Changed To Negative From
Stable
..Issuer: EE Limited
....Outlook, Changed To Negative From
Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Telecommunications
Service Providers published in January 2017. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
BT Group Plc, which operates principally through its 100%-owned
subsidiary British Telecommunications Plc, is the leading provider
of local, long-distance and international telecommunications
services in the UK, and is one of the world's leading providers
of communications solutions and services, operating in more than
180 countries. Following the completion of the acquisition of EE
Limited (EE) in January 2016, BT has also become one of the largest
mobile network operators in the UK.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Sebastien Cieniewski
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
