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Rating Action:

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

22 Mar 2018

Madrid, March 22, 2018 -- Moody's Investors Service (Moody's) has today affirmed the Ba2 corporate family rating (CFR) and the Ba2-PD Probability of Default Rating ("PDR") of Sunrise Communications Group AG (Sunrise). Concurrently, Moody's has affirmed the Ba2 rating of Sunrise Communications Holdings S.A's CHF910 million senior secured term loan facility, CHF200 million senior secured revolving credit facility and CHF500 million senior secured notes.

The outlook on all ratings remains stable.

"The rating affirmation reflects that Sunrise is strongly positioned in the rating category, with leverage and cash flow metrics at the strong end of the Ba2 rating. However, the rating also reflects a degree of event risk given the risk of consolidation in Switzerland in Moody's view," says Laura Pérez, a Moody's Vice President - Senior Analyst and lead analyst for Sunrise.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

Moody's expects Sunrise's underlying EBITDA (excluding the impact of the tower sale) to grow in the low single digits in the next 18 to 24 months mainly driven by improving revenue growth (including the impact of Mobile Termination Rates). Including the impact of the tower sale, Moody's expects the company's reported EBITDA to be slightly lower, at CHF580 million, for FYE 2018, from CHF592 million in FYE 2017, driven by higher operating expenses arising from the service agreement for the use of the towers.

Sunrise's network quality has significantly improved in recent years. As result, net subscriber additions have grown strongly on a sustained basis. In addition, growth in the convergent offering Sunrise One, will continue to support revenue growth, offsetting the structural declines in landline and pre-paid. Nevertheless, Moody's expects competitive pressures to increase following Salt's new triple and quad-play offerings that are priced at a significant discount to Swiss peers.

Moody's expects free cash flow generation (after dividends) to be negative in 2018 and in 2019 driven by up-front investments in the recently signed new fibre agreement with utilities (CHF56 million), spectrum investments in the second half of 2018 and higher dividend payments. As a result, Moody's expects Sunrise's gross leverage to increase to 2.8x in FYE 2018 from 2.6x in 2017, before improving to 2.7x in FYE 2019.

Moody's believes that Sunrise is strongly positioned in the Ba2 rating category. The company retains a degree of flexibility in its current rating category if it decided to participate in the potential consolidation in the Swiss market.

Sunrise's reported leverage ratios benefit from the sale of towers announced in May 2017, as a significant part of the proceeds (CHF450 million) were used for debt repayment which led to a 0.6x reduction in gross debt to EBITDA in FYE 2017. However, Moody's believes that the tower sale does not materially change Sunrise's underlying credit fundamentals as the reduction in reported financial debt was largely offset by an operational liability arising from the long-term tower service agreement. Sunrise entered into a twenty-year service agreement contract with Cellnex Telecom S.A (unrated) for the use of the towers, which are critical infrastructure assets.

Moody's believes the service agreement shares economic similarities with an operating lease, although it is not accounted as such in IAS17 nor does the company expect that it will be reported as an operating lease under IFRS16. As a result, Sunrise will not be required to capitalise the associated asset and record a debt-like liability.

However, the multi-year service contract agreement does represent a significant increase in an operating liability, thereby reducing the company's financial and operational flexibility, compared with an ownership model with full economic control. If Moody's included the net present value of the estimated CHF35 million service agreement fee, the company's underlying leverage ratio would remain at around 3x in 2017, not materially different from the previous year.

Furthermore, the company's free cash flow to debt ratios (Moody's definition) weakened post transaction to an estimated pro-forma 3.4% in FYE 2017, down from 4.3%, driven by the increased dividend payout to 85% of free cash flow, up from 65%.

Moody's has adjusted the ratio triggers for the Ba2 rating category to reflect the economic impact of the tower service agreement with gross adjusted debt to EBITDA at 2.75x-3.25x and Retained Cash Flow (RCF) to debt ratios at 22%-17%, compared with the previous levels of 3x-3.5x and 20%-15% respectively. The adjustment of the ratio triggers reflects the underlying operating liability of the tower service agreement and the associated benefits of entering in a long-term contract for a critical infrastructure asset, which will result in greater cost visibility compared to a short-term contract.

RATIONALE FOR STABLE OUTLOOK

Sunrise is strongly positioned in the Ba2 rating category. The stable outlook reflects our expectation of improving revenue trends and underlying EBITDA which will lead to debt to EBITDA of 2.7x and RCF to debt of 22% in the next 18-24 months. The stable outlook also reflects a degree of event risk in the rating, as Moody's believes the risk of consolidation in continental Europe, including Switzerland, is increasing.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the rating could develop if Sunrise's management team delivers on its business plan with consistent improvement in underlying service revenue and KPI trends together with growing EBITDA such that the company's (1) debt/EBITDA ratio (as adjusted by Moody's) is consistently below 2.75x; and (2) retained cash flow (RCF)/debt ratio (as adjusted by Moody's) increases towards 22% on a sustained basis.

Conversely, downward pressure could be exerted on the rating if Sunrise's underlying operating performance weakens or the company implements more aggressive-than-expected financial policies such that debt/EBITDA (as adjusted by Moody's) is higher than 3.25x and RCF/debt (as adjusted by Moody's) is below 17% on a sustained basis.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Sunrise Communications Group AG

.... Corporate Family Rating, Affirmed Ba2

.... Probability of Default Rating, Affirmed Ba2-PD

..Issuer: Sunrise Communications Holdings S.A.

....Backed Senior Secured Bank Credit Facility, Affirmed Ba2 (changed to LGD-4 from LGD-3)

....Senior Secured Regular Bond/Debenture, Affirmed Ba2 (changed to LGD-4 from LGD-3)

Outlook Actions:

... Issuer: Sunrise Communications Group AG

....Outlook, Remains Stable

....Issuer: Sunrise Communications Holdings 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.

COMPANY PROFILE

Sunrise Communications Group AG (Sunrise) is the ultimate parent of Sunrise Communications Holdings S.A. (SCH). Headquartered in Zurich, Sunrise is the second-largest integrated telecom operator in Switzerland. At year-end 2017, the company reported revenue of CHF1.9 billion and EBITDA of CHF592 million.

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.

Laura Perez Martinez
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
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 Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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