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Rating Action:

Moody's assigns B1 CFR to PLAY; stable outlook

21 Jan 2014

(P)B1 and (P)B2 ratings assigned to proposed senior secured and unsecured notes

Madrid, January 21, 2014 -- Moody's Investors Service has today assigned a first-time B1 corporate family rating (CFR) and a Ba3-PD probability of default rating (PDR) to Play Holdings 2 S.à r.l., the ultimate parent of P4 Sp. Z o.o. (PLAY), Poland's fourth-largest mobile network operator. Concurrently, Moody's has assigned a provisional (P)B1 rating and loss given default (LGD) assessment of LGD4 (59%) to the proposed equivalent EUR630 million worth of senior secured notes due in 2019 to be issued by Play Finance 2 S.A. and a provisional (P)B2/LGD 6 (95%) to the proposed EUR240 million worth of senior unsecured notes due in 2019 to be issued by Play Finance 1 S.A. The outlook for all ratings is stable. This is the first time that Moody's has assigned ratings to PLAY.

The rating assignment follows the company's dividend recapitalisation, as a result of which PLAY will distribute PLN1.3 billion (EUR309 million) to its shareholders and will refinance PLN2.5 billion (EUR597 million) of existing bank debt through the issuance of PLN3.7 billion (EUR870 million) worth of senior secured and senior unsecured notes. Around PLN561 million (EUR133 million) of proceeds from the senior unsecured notes issuance will be placed into an escrow account, and will be released to the shareholders or the company subject to certain conditions.

"The assigned B1 rating balances our assessment of, among other things, PLAY's small size, its concentration in Poland, the weakness of its mobile-only model and its foreign currency risk against more positive factors, such as its track record of revenue and market share growth and the expected fast deleveraging profile due to its growing free cash flow generation," says Iván Palacios, a Moody's Vice President - Senior Credit Officer and lead analyst for PLAY.

Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect the rating agency's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the company's proposed senior secured and senior unsecured notes. The definitive rating may differ from the provisional rating.

RATINGS RATIONALE

--B1 CORPORATE FAMILY RATING AND Ba3-PD PROBABILITY OF DEFAULT RATING

The assigned B1 rating negatively reflects (1) PLAY's small size, its fourth-place position in the Polish mobile market and its concentration in Poland; (2) its mobile-only business model, which Moody's believes is weaker than an integrated business model; (3) its foreign exchange risk, given that the majority of its debt and part of its costs and capex are denominated in foreign currency while revenues are primarily denominated in local currency; (4) the uncertainty regarding the outcome of the 800MHz/2600MHz spectrum auction; and (5) the flexibility embedded in the structure, which allows the shareholders to relever the company up to 3.75x net reported debt/EBITDA in order to distribute additional dividends.

At the same time, the rating positively reflects (1) PLAY's track record of growth in market share and revenues since commercial launch in 2007; (2) the better growth prospects for the Polish market when compared with other European markets; (3) the expected stabilisation of the competitive and regulatory environments in Poland; (4) the expected fast deleveraging profile, as the company benefits from operating leverage and stable capex; (5) its growing free cash flow generation; and (6) its adequate liquidity profile.

With reported revenues of PLN3.7 billion (EUR889 million) and EBITDA of PLN689 million (EUR163 million) for the last 12 months ended September 2013, PLAY is one of the smaller mobile telecom operators in Moody's rated universe in Europe. As such, the company's scale and its lack of geographical diversification are likely to remain constraining factors on the ratings. An offsetting consideration is the fact that Poland enjoys better dynamics than other European markets in terms of GDP growth and mobile broadband growth.

PLAY's mobile-only business model makes it more vulnerable to the potential success of convergent offerings provided by integrated operators, although the benefits of an integrated business model may be less clear in Poland than in other countries due to the underinvestment in fixed-line infrastructure, the low level of broadband penetration and the low pricing environment.

The Polish mobile market has been very competitive over the past few years, primarily driven by PLAY's aggressive market share growth strategy. Since commercial launch in 2007, PLAY has taken market share from the three competitors, T-Mobile (Deutsche Telekom AG), Orange (Telekomunikacja Polska S.A.) and Plus (Eileme 1 AB (publ)), to reach a market share of 18.4% of total mobile subscribers as of September 2013. Now that PLAY has achieved critical mass, and with its increased focus on customer retention, Moody's expects the competitive environment to stabilise. Moody's also expects the regulatory environment to be less challenging going forward, as mobile termination rates are now at the low end of the EU's recommended target.

PLAY's network coverage is weaker than peers, as is its spectrum ownership in the <1GHz band. However, PLAY has signed national roaming/network sharing agreements with all three operators in Poland to enhance its network coverage and optimise capex while benefitting from a relatively fixed opex base. The company could enhance its spectrum portfolio in the upcoming 800MHz/2600Mhz spectrum auction, but the outcome is uncertain.

Initial leverage at transaction closing will be high, given that debt/EBITDA (as adjusted by Moody's) will be around 4.8x. However, Moody's expects that PLAY will delever to around 4.0x by end-2014. The company should enjoy a fast deleveraging profile, as a result of improved cash flow generation through the combined benefits of operating leverage and stable capex. However, the company retains the flexibility to relever the balance sheet up to 3.75x net debt/EBITDA (as reported by the company) to pay additional shareholder distributions.

PLAY's liquidity profile post transaction will be adequate, supported primarily by the availability under the PLN400 million (EUR95 million) four-year super senior revolving credit facility (SSRCF) with no financial maintenance covenants. Its debt maturity profile will be good, with no mandatory debt repayments until the maturity of the SSRCF in 2018.

Given that the SSRCF is covenant-lite, Moody's has used an "all-bond" capital structure assumption for the group's family recovery rate (35% instead of the standard 50%). Under an "all-bond" structure, recoveries for noteholders in the event of a default are typically lower than in a "bank-bond" structure due to the absence of maintenance financial covenants. As a result, PLAY's PDR is one notch higher than the CFR, at Ba3-PD.

-- PROVISIONAL (P)B1 and (P)B2 RATINGS ON SENIOR SECURED AND UNSECURED NOTES

The rating on the EUR630 million senior secured notes is (P)B1, in line with the CFR, given that it is the largest piece of debt in the capital structure. The EUR240 million senior unsecured notes are rated (P)B2, one notch lower than the rating on the senior secured notes. The one-notch difference reflects the high initial leverage and the substantial amount of secured bond debt that effectively ranks senior to the senior unsecured notes. This debt potentially limits the amount of residual collateral value available to the senior unsecured noteholders in a recovery scenario.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects the initially weak positioning of PLAY's credit metrics for the rating category, but also factors in Moody's expectation that the company will deleverage quickly and maintain an adjusted debt/EBITDA ratio (as adjusted by Moody's) between 4.2x and 3.5x, while it will continue to generate positive free cash flows.

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 adjusted debt/EBITDA ratio drops below 3.5x on a sustained basis. However, upward pressure on the rating may be limited due to the flexibility embedded in the bond indenture, as a result of which the shareholders may relever the balance sheet to distribute additional dividends as long as net debt/EBITDA (as reported by the company) is below 3.75x.

Downward pressure could be exerted on the rating if PLAY's operating performance weakens or the company increases debt as a result of acquisitions or shareholder distributions such that its adjusted debt/EBITDA remains above 4.2x. A weakening in the company's liquidity profile could also exert downward pressure on the rating.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was the Global Telecommunications Industry published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Play Holdings 2 S.à r.l. is the ultimate parent of P4 Sp. Z o.o., Poland's fourth 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 September 2013, PLAY had approximately 10.3 million reported subscribers (of which 44% were contract subscribers) and a mobile market share of 18.4%. In the last 12 months ended September 2013, PLAY reported revenues of PLN3.7 billion (c.EUR889 million) and EBITDA of PLN689 million (EUR163 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Ivan Palacios
VP - Senior Credit Officer
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
SUBSCRIBERS: 44 20 7772 5454

Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns B1 CFR to PLAY; stable outlook
No Related Data.
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