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Rating Action:

Moody's affirms Play's B2 CFR, assigns Caa1 rating to new PIK notes; outlook stable

13 Mar 2017

London, 13 March 2017 -- Moody's Investors Service, ("Moody's") has today assigned a Caa1 rating to the proposed issuance of €500 million (PLN2.15 billion equivalent) of payment-in-kind (PIK) toggle notes due 2022 by Play Topco S.A. (Play Topco), the ultimate parent of P4 Sp. z o.o. (Play), Poland's second-largest mobile network operator by subscribers. Concurrently, Moody's has affirmed Play Topco's B2 corporate family rating (CFR) and downgraded the probability of default rating (PDR) to B2-PD from B1-PD. The outlook for all ratings remains stable.

The ratings on the existing debt instruments at Play Topco, Play Finance 1 S.A. and Play Finance 2 S.A. remain unchanged and will be withdrawn once they are repaid with proceeds from the new PLN7 billion senior facilities agreement that Play has recently signed.

The rating action follows the announcement that the company plans to refinance its existing notes at Play Finance 1 S.A. and Play Finance 2 S.A. as well as the existing €415 million of PIK notes at Play Topco with PLN7.0 billion of term loans in addition to issuing €500 million of new PIK toggle notes at Play Topco in order to fund a dividend distribution to shareholders.

"The rating affirmation reflects that this transaction continues a series of leveraging dividend recapitalizations, whilst acknowledging the company's solid operating and financial performance with credit metrics still aligned with its current rating," says Alejandro Nuñez, a Moody's Vice President -- Senior Analyst and lead analyst for Play.

RATINGS RATIONALE

AFFIRMATION OF B2 CORPORATE FAMILY RATING AT PLAY TOPCO

The rating affirmation reflects (1) the increase in group leverage as a result of the new PIK notes issuance, proceeds of which the company will use to pay a distribution to its shareholders, which is nevertheless still within the leverage parameters consistent with its current rating; (2) the financial strategy implemented by the shareholders; and (3) the reduced foreign currency exposure given that, as a result of this transaction, most of Play's debt will be denominated in Polish zloty and therefore better matched to the group's cash flows.

Following this transaction and including the associated shareholder distribution of PLN2.15 billion, Moody's estimates that Play Topco's adjusted gross debt/EBITDA (Moody's adjusted) for FY2017 will be around 4.7x. This is in the middle of the 4.2x-5.0x gross leverage range that the rating agency considers appropriate for Play to be rated in the B2 category. This shareholder distribution, funded by the PLN2.15 billion equivalent of new PIK notes, is 34% higher than the pre-transaction debt level of PLN6.2 billion, which demonstrates Play's shareholders aggressive financial strategy.

The terms of this "pay if you can" PIK note provide for cash interest payments subject to compliance with the restricted payments capacity. Given the current restricted payments capacity, it is likely that the PIK notes coupon will be paid in cash, resulting in lower free cash flow generation than previously anticipated, although they afford the company flexibility as it embarks on an investment program to build out its own nationwide network.

Moody's also notes that the company's operating performance over the past few years has been strong, in line with or slightly exceeding management's budget. As a result, continued performance in line with the budget should translate into a consistent deleveraging profile despite the increase in leverage resulting from this dividend recapitalization. Moody's expects that the pace of growth in revenues and EBITDA will slow going forward as Play has reached a significant market share and scale and that growth from current levels will be more challenging.

The B2 CFR also reflects: (1) Play's second-place position in the Polish mobile market (by number of subscribers) and its concentration in Poland; (2) Play's track record of growth in market share and revenues since commercial launch in 2007; (3) the better growth prospects for the Polish market when compared with other European markets; (4) an expected stabilization of the competitive and regulatory environments in Poland; (5) Play's balanced spectrum position, compared with T-Mobile and Orange and particularly in the most efficient sub-1GHz bands, and a commercial de-risking strategy to reduce its reliance on network roaming agreements; (6) Play's moderate deleveraging profile as the company benefits from operating leverage yet rising capex through 2020; (7) its positive and growing free cash flow generation; and (8) a good liquidity profile and significantly reduced foreign exchange risk following a recent refinancing.

At the same time, the rating reflects: (1) Play's mobile-only business model, which could be challenged over time by converged business models, and its concentration in Poland; (2) a track record of aggressive financial policies implemented to date by the shareholders; and (3) our expectation that the shareholders could make use of the financial flexibility that Play will develop over time as it progressively deleverages, in light of the new PIK notes' covenant leverage test of 4.5x net reported debt/EBITDA.

PROBABILITY OF DEFAULT RATING OF B2-PD

The PDR has been downgraded to B2-PD from B1-PD to principally reflect a higher family recovery rate of 50% and the presence of meaningful maintenance covenants in Play's new term loans which would help to avoid value erosion in a scenario of deteriorating credit quality. The previous B1-PD PDR reflected a lower (35%) recovery rate and a largely covenant-lite structure.

Caa1 RATING ON NEW PIK NOTES

The Caa1 rating on the new PIK notes issued by Play Topco is two notches below the group's B2 CFR. This notching differential reflects the PIK notes' structural and effective subordinated position relative to the other debt instruments in the group's capital structure. Due to the high initial leverage and the substantial amount of secured term loans that effectively rank ahead of the new PIK notes in case of enforcement, Moody's expects that the recoveries for the PIK noteholders in a default scenario would be limited.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Play's solid operating performance and credit metrics for the rating category but also factors in the risk, given the company's record of recapitalizations and a Play Topco net leverage test of 4.5x, that the company may releverage itself towards its maximum net leverage target of 4.0x.

The stable outlook also reflects Moody's expectation that over the next 12-18 months, the company will deleverage toward a Gross debt/EBITDA ratio (Moody's adjusted) below 4.2x while it continues to generate positive and increasing free cash flow.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the rating could develop if the company delivers on its business plan, such that its (Moody's-adjusted) Gross debt/EBITDA ratio drops below 4.2x and its (Moody's-adjusted) Retained Cash Flow / Gross debt exceeds 15% on a sustained basis. However, upward pressure on the rating may be limited owing to the flexibility embedded in the debt documentation, as a result of which the shareholders may releverage the balance sheet up to 4.5x net reported debt/EBITDA (through the PIK at Play Topco level).

Downward pressure could be exerted on the rating if Play's operating performance weakens or if the company increases debt as a result of acquisitions or shareholder distributions such that its (Moody's-adjusted) Gross debt/EBITDA rises above 5.0x and its (Moody's-adjusted) Retained Cash Flow / Gross debt declines below 10% on a sustained basis. A weakening in the company's liquidity profile could also exert downward pressure on the rating.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Play Topco S.A.

.... Corporate Family Rating, Affirmed B2

Downgrades:

..Issuer: Play Topco S.A.

.... Probability of Default Rating, Downgraded to B2-PD from B1-PD

Assignments:

..Issuer: Play Topco S.A.

....€500 million Senior Unsecured PIK Debentures, Assigned Caa1

Outlook Actions:

..Issuer: Play Topco S.A.

....Outlook, Remains 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.

Play Topco S.A. is the ultimate parent of P4 Sp. z o.o., Poland's second mobile network operator in terms of subscribers. The company operates under the commercial name "PLAY" and offers voice, non-voice and mobile broadband products and services to residential and business customers. As of December 2016, Play had approximately 14.4 million reported subscribers (of which 58% were contract subscribers) and a mobile market share of 26.3%. For FY2016, Play reported revenues of PLN6.12 billion (€1.42 billion) and adjusted EBITDA of PLN2.03 billion (€473 million). Play's shareholders are Olympia Development (through Tollerton Investments Limited) with a 50.3% stake, and Novator with a 49.7% stake.

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
SUBSCRIBERS: 44 20 7772 5454

Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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