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Rating Action:

Moody's affirms Colt's Ba2 ratings; outlook stable

16 May 2018

London, 16 May 2018 -- Moody's Investors Service ("Moody's") has today affirmed Colt Group S.A.'s (Colt) Corporate Family Rating (CFR) of Ba2 as well as its Probability of Default Rating (PDR) of Ba2-PD. The outlook on the ratings is stable.

"The affirmation of Colt's ratings primarily reflects the company's gradually improving profitability following the company's exit from unprofitable and non-core IT services businesses, adequate liquidity, and strategic and financial support provided by Colt's long-term shareholder and parent, FMR. It also reflects Colt's comparatively low gross leverage counterbalanced by our expectation of continued negative free cash flow as the company pursues its growth initiatives over the next two years," says Alejandro Núñez, a Moody's Vice President -- Senior Analyst and lead analyst for Colt.

RATINGS RATIONALE

Colt's Ba2 CFR reflects: (1) the fragmented and very competitive landscape for business telecoms in Europe; (2) Colt's flat average organic revenue and EBITDA growth over 2015-2017; and (3) Moody's expectation of continued negative free cash flow generation as the company pursues its growth initiatives.

The rating also reflects: (1) the company's fully owned and managed, pan-European fibre network, which gives it a competitive advantage over non-facilities-based alternative carriers; (2) progress in profitability following the company's exit from unprofitable and non-core businesses; (3) the company's low gross leverage, with little financial debt in its capital structure; (4) adequate liquidity; and, (5) a supportive ownership strategy and flexible funding from Colt's 100% controlling shareholder, FMR LLC (FMR, A1 stable).

Although Moody's expects the company to post average low single-digit percentage revenue and EBITDA growth over the next two years, it also expects Colt's capex will increase from 2018 following a year of elevated investments in its network and data centres portfolio. Colt's strategy envisages higher capital spending to invest in Colt Data Centre Services (DCS), particularly in Asia, and in extending its fibre network via buy or new-build projects in Europe, Asia and the U.S. over the next two years.

Moody's expects Colt's elevated capital spending level over 2017-2019 will continue to be the principal driver of its free cash generation over the next two years and, as a consequence, the company's free cash flow is expected to be negative and its post-capex interest coverage to be weak over that period. While these ratios are weaker than the average levels for similarly rated communications infrastructure companies, the agency considers these over a multi-year period in the context of Colt's 2017-2019 capex, which should lead to increased growth from around 2020. Although gross leverage (adjusted by Moody's primarily to capitalise around EUR330 million of operating leases) is expected to rise modestly over the same period to around 1.5x, Colt's leverage remains modest for the rating.

In addition, Moody's acknowledges a track record over the past three years of supportive, flexible funding from Colt's ultimate parent and 100% shareholder, FMR for Colt's growth and the absence of cash extracted by FMR from Colt's business. The agency also acknowledges that the main source of external funding Colt has is a EUR265 million facility due 2020 provided by FMR which is flexible and does not include onerous debt restrictions or triggers.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects our expectation that Colt's revenue and earnings growth trends will gradually improve as the company pursues a period of more intensive investments over the next two years. The outlook also reflects an expectation that Colt's strategy and funding will continue to be supported by FMR.

WHAT COULD CHANGE THE RATING UP / DOWN

Colt's rating could move upward if the company: (1) achieves and maintains positive overall organic revenue growth and generates meaningful growth in EBITDA and free cash flow such that its free cash flow/gross debt (Moody's-adjusted) remains consistently in the low double digits in percentage terms; and (2) maintains its gross debt/EBITDA (Moody's-adjusted) consistently below 1.5x.

Colt's rating could move downward if: (1) Colt's revenue growth, EBITDA growth and free cash flow generation turn materially negative on a sustained basis; or (2) the company's gross debt/EBITDA (Moody's-adjusted) increases sustainably above 2.5x. Clear signs of a more aggressive financial policy or significantly reduced support from FMR could also be credit negative.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Communications Infrastructure Industry published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Incorporated in Luxembourg, Colt provides a range of information and communication technology services to enterprises across cities in Europe, Asia and North America, with a focus on network, voice and data centre services to businesses. The company has an extensive international next-generation network with deep local fibre access and colocation assets in key cities and information hubs in 29 countries across Europe, Asia and North America. These facilities provide Colt's customers, ranging from large multinational enterprises to medium-sized companies, with seamless end-to-end capabilities across technologies and geographies. Colt's Internet Protocol networks connect 51 metropolitan area networks in 207 cities globally. Colt's also operates 16 carrier-neutral data centres across Europe and eight in the Asia-Pacific region. In 2017, Colt generated revenue of €1.6 billion and €332 million of EBITDA. The company is 100% owned by FMR LLC and FIL Limited, which are Fidelity companies (collectively referred to herein as "FMR").

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Alejandro Nunez
Vice President - Senior Analyst
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

Ivan Palacios
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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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​

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