Hong Kong, November 15, 2021 -- Moody's Investors Service has affirmed CK Hutchison Group Telecom Holdings
Limited's (CKHGT) Baa1 issuer rating and the Baa1 backed senior
unsecured ratings on the notes issued by CK Hutchison Group Telecom Finance
S.A. The notes are unconditionally and irrevocably guaranteed
by CKHGT.
The rating outlooks remain stable.
"The rating affirmation primarily reflects a significant improvement in
CKHGT's debt leverage and financial flexibility following the sale
of its tower assets. This factor offsets weakening operating performance
and persistent challenges in its two largest markets, Italy and
the UK," says Gloria Tsuen, a Moody's Vice President and Senior
Credit Officer.
RATINGS RATIONALE
CKHGT's Baa1 ratings reflect its underlying credit quality and a
two-notch uplift based on likely support from its parent CK Hutchison
Holdings Limited (CKHH, A2 stable).
CKHGT's underlying credit strength is supported by its long and
established track record of operating in geographically diverse markets,
solid cash generation, good liquidity and, after the sale
of its tower assets, low net debt leverage.
These strengths are counterbalanced by the company's moderate market
position, its focus on wireless services, and the persistently
challenging industry conditions in its largest market Italy, which
contributed 53% of the company's reported underlying EBITDA
in the first half (H1) of 2021.
In Italy, revenue and reported EBITDA at its subsidiary Wind Tre
decreased 10% and 7%, respectively, in H1 2021.
This was driven by intense competition and reduced contribution from wholesale
revenue as Iliad S.A. built out its own network and reduced
wholesale traffic on Wind Tre's network.
Moody's expects that, after further deterioration in 2022,
Wind Tre's performance will start stabilizing only in 2023,
as the impact from wholesale revenue loss subsides and Wind Tre improves
its market share on the back on its upgraded network. That said,
there is a degree of downside risk to this projection.
Given this development and higher leasing expense after the tower asset
sale, Moody's expects CKHGT's adjusted EBITDA margin
to decline to around 34% in 2022 from 41% in 2020.
Likewise, its revenue will decrease to about EUR9.9 billion
in 2022 from EUR10.2 billion in 2020. This assumption is
despite an expected slow recovery in its UK operations, after a
significant weakening in 2020.
Of its planned sale of tower assets in six European counties for EUR10
billion, CKHGT has completed the sale in five countries, and
the sale in the U.K. is under regulatory review.
Moody's expects CKHGT to use a significant portion of the proceeds
to either pay down debt or keep as a cash buffer. The company's
total adjusted debt declined to EUR11.6 billion as of the end of
June 2021, from EUR14.0 billion as of the end of 2019.
In this regard, Moody's forecasts CKHGT's adjusted debt/EBITDA
will improve to 2.6x-2.7x in 2021-22 from
3.0x-3.1x in 2019-20, and its adjusted
net debt/EBITDA will improve to 1.5x-1.7x from 2.1x-2.6x
over the same periods. These levels are consistent with CKHGT's
current standalone credit quality.
CKHGT's rating also reflects the company's wireless-focused
business model in most of its markets, which present operating challenges,
given the increasing fixed-wireless convergence and the importance
of fixed-line networks for 5G services. This risk is mitigated
by the company's strategic agreements with local fixed-line
providers.
CKHGT's Baa1 rating continues to incorporate a two-notch
parental uplift, which reflects Moody's expectation that the company
will likely receive support from CKHH in times of need.
This view is supported by (1) CKHGT's high strategic and financial
importance to CKHH, given the subsidiary's position as one of the
four core businesses of CKHH; (2) CKHH's 100% ownership
and close management and financial control over the company; and
(3) the sharing of the CK Hutchison brand, suggesting CKHH's
low tolerance for reputational risk, should CKHGT become financially
distressed.
CKHGT's liquidity is excellent. The company's cash holdings,
including short-term bank deposits, of EUR6.5 billion,
as of June 2021, together with operating cash flow, will be
sufficient to cover its capital spending, license costs, and
maturing debt of EUR604 million over the next 12 months.
In terms of environmental, social and governance factors,
the rating considers CKHGT's private company status and its close linkage
with CKHH, which has a shareholding concentration in the owner family.
These factors are mitigated by disclosures of CKHGT's information
including through its listed parent, and board oversight exercised
through independent directors at CKHH.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
CKHGT's stable rating outlook reflects Moody's expectation that the company's
presence in its key markets and credit metrics will remain steady over
the next one to two years.
Moody's could upgrade CKHGT's rating if its (1) competitive positions
in its local markets and operating performance improve significantly,
and (2) adjusted debt/EBITDA stays below 1.8x and adjusted retained
cash flow (RCF)/debt remains above 45%.
However, Moody's would downgrade CKHGT's rating if (1) the company's
competitive positions in local markets or operating performances,
especially in Italy, weaken further, or (2) it pursues an
aggressive shareholder distribution or investment strategy.
Specific metrics for a downgrade include adjusted debt/EBITDA remaining
above 2.5x-2.75x or RCF/debt staying below 30%.
The principal methodology used in these ratings was Telecommunications
Service Providers published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
CK Hutchison Group Telecom Holdings Limited is a holding company that
consolidates the European and Hong Kong telecommunications operations
of CK Hutchison Holdings Limited (CKHH). It pools CKHH's telecommunications
assets across Italy, the UK, Austria, Sweden,
Denmark, Ireland and Hong Kong SAR, China/Macao SAR,
China, with over 95% of cash flow generating capabilities
from Europe. It is fully owned by CKHH.
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Gloria Tsuen, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Chris Park
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
