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Rating Action:

Moody's assigns Ba2 CFR to Sunrise Communications Group AG, (P)Ba2 ratings to new debt instruments; outlook stable

06 Feb 2015

Madrid, February 06, 2015 -- Moody's Investors Service has today assigned a Corporate Family Rating (CFR) of Ba2 and a Probability of Default Rating (PDR) of Ba2-PD to Sunrise Communications Group AG (Sunrise). Concurrently, Moody's has withdrawn the B1 CFR and B1-PD PDR at the Sunrise Communications Holdings S.A. (SCH) level. Moody's has also assigned a provisional (P)Ba2 rating to Sunrise Communications Holdings S.A.'s CHF1.36 billion Term Loan B facility, CHF200 million revolving credit facility and CHF500 million (equivalent) senior secured notes due 2022. The outlook on the ratings is stable.

"The Ba2 rating reflects the successful completion of Sunrise's IPO, with proceeds used to reduce leverage, as well as the company's prudent leverage target which should lead to more predictable financial policies going forward," says Iván Palacios, a Moody's Vice President -- Senior Credit Officer and lead analyst for Sunrise.

The rating action concludes the review process that was initiated on 27 January.

The ratings on the existing debt instruments issued by SCH and Sunrise Communications International S.A. (SCI) were unaffected by the review and remain unchanged, as they will shortly be redeemed with proceeds from the new debt issuance and from the initial public offering (IPO) of Sunrise on the SIX Swiss Exchange. Moody's expects to withdraw the ratings on the existing debt instruments once they are repaid.

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 proposed debt instruments. The definitive ratings may differ from the provisional rating.

RATINGS RATIONALE

The Ba2 rating assigned to Sunrise is two-notches above the B1 CFR that Moody's previously assigned to SCH. The rating differential mainly reflects the benefit of the IPO proceeds, which will lower the company's leverage and cost of debt. Sunrise has raised approximately CHF1.36 billion (EUR1.29 billion) of primary proceeds from the IPO which will be used to repay debt, including the CHF632 million (EUR600 million) payment-in-kind (PIK) toggle debt at Mobile Challenger Intermediate Group S.A. (MCIG), a parent holding company outside of the SCH restricted group. Gross debt at the SCH level will decline to around CHF1.9 billion (EUR1.8 billion), after transaction costs, from CHF2.4 billion (EUR2.3 billion) pre-transaction. SCH's net reported debt/EBITDA ratio will decline to around 2.7x, on a pro-forma basis, from 3.7x in September 2014.

As a result of the repayment of the PIK toggle notes at MCIG level, the group's capital structure will be simplified. The PIK debt has so far been an overhang for SCH's rating, owing to the potential risk that it could be refinanced within SCH's restricted group once sufficient financial flexibility had developed. Following the repayment of the PIK debt and with a simplified group structure, this overhang on the rating has been removed.

The rating upgrade also reflects Sunrise's stated objective to maintain leverage (as measured by reported net debt/EBITDA ratio) at around 2.5x in the medium term. This level is broadly equivalent to a Moody's adjusted gross debt/EBITDA ratio of around 3.0x to 3.5x. The company has also announced new shareholder remuneration policies, including the decision to pay a CHF135 million (EUR128 million) dividend in 2016, and its commitment to a dividend payout ratio of at least 65% of equity free cash flow thereafter. In addition, once Sunrise reaches its target capital structure of 2.5x net reported debt/EBITDA, it plans to return excess cash to shareholders.

The new financial leverage and shareholder remuneration targets, as well as the expected gradual exit of the private equity sponsor from the shareholding structure will provide predictability over future financial policies, reducing the risk of an unexpected re-leveraging. While Sunrise will have significant headroom under the debt maintenance covenant of its senior bank facilities, which limits increases in net debt/EBITDA beyond 4.75x, the Ba2 rating assumes that the company will operate under its self-imposed leverage target of 2.5x.

Moody's has also reflected in its rating upgrade the improving trend in key metrics observed more recently, supported by new product offerings ("Freedom" in mobile and "Home" in fixed), which are accelerating growth. Nevertheless, Moody's notes that Freedom has provided a one-time boost in performance, and has temporarily inflated EBITDA as a result of its accounting treatment, but EBITDA will stabilise as penetration tapers off.

The sustainability of revenue growth trends over the medium term will also be dependent upon the evolving competitive environment in the Swiss market, which has recently seen the acquisition of Orange Switzerland by NJJ Capital, and the launch of an MVNO offering by Cablecom, the cable operator. In addition, there is a degree of uncertainty as to the evolution of the Swiss economy after the removal of the Euro-peg, and the impact of a slowdown in GDP on the telecoms sector.

The ratings on the bank facilities and senior secured notes is (P)Ba2, at the same level as the company's CFR. All the debt ranks pari passu and benefits from the same security package.

Moody's has assigned the CFR to Sunrise, as it will be the only entity within the group providing consolidated financial statements on a go forward basis. The Ba2 rating reflects, among other things, Moody's expectation that there will not be material differences between the financial statements of SCH and those of Sunrise. In the absence of an ongoing obligation to provide reconciliation between the financial position of SCH and SCG, the rating is based on the expectation that Moody's will receive audited standalone financial statements for the different group entities.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the rating could develop if Sunrise's management team delivers on its business plan, such that the company's (1) debt/EBITDA ratio (as adjusted by Moody's) reaches 3.0x or below; and (2) retained cash flow (RCF)/debt ratio (as adjusted by Moody's) increases towards the low twenties.

Conversely, downward pressure could be exerted on the rating if Sunrise's operating performance weakens or the company implements more aggressive-than-expected shareholder remuneration policies such that debt/EBITDA (as adjusted by Moody's) is higher than 3.5x and RCF/debt (as adjusted by Moody's) is below 15% on a sustained basis.

PRINCIPAL METHODOLOGIES

The principal methodology used in these ratings was 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.

Headquartered in Zurich, Sunrise is the second-largest integrated telecommunications operator in Switzerland. The company has over 3.3 million customer relationships in Switzerland and provides mobile, landline voice, landline internet and IPTV services. It has market shares of 27% in mobile and 9% in fixed broadband. For the 12-month period ended September 2014, the company reported revenues of CHF2 billion and EBITDA of CHF621 million. Sunrise was owned by the TDC A/S group until September 2010, when it was sold to funds advised by private equity firm CVC Capital Partners.

LIST OF AFFECTED RATINGS

Assignments:

..Issuer: Sunrise Communications Group AG

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

.... Corporate Family Rating, Assigned Ba2

..Issuer: Sunrise Communications Holdings S.A.

....Senior Secured Bank Credit Facility (Foreign Currency) Jan 13, 2021, Assigned (P)Ba2

....Senior Secured Bank Credit Facility (Foreign Currency) Jan 13, 2020, Assigned (P)Ba2

....Senior Secured Bank Credit Facility (Foreign Currency) Jan 13, 2021, Assigned a range of LGD3

....Senior Secured Bank Credit Facility (Foreign Currency) Jan 13, 2020, Assigned a range of LGD3

....Senior Secured Regular Bond/Debenture (Local Currency), Assigned (P)Ba2

....Senior Secured Regular Bond/Debenture (Local Currency), Assigned a range of LGD3

....Senior Secured Regular Bond/Debenture (Foreign Currency), Assigned (P)Ba2

....Senior Secured Regular Bond/Debenture (Foreign Currency), Assigned a range of LGD3

.... Probability of Default Rating, Withdrawn , previously rated B1-PD

.... Corporate Family Rating (Foreign Currency), Withdrawn, previously rated B1

.... Corporate Family Rating (Local Currency), Withdrawn, previously rated B1

Outlook Actions:

..Issuer: Sunrise Communications Group AG

....Outlook, Assigned Stable

..Issuer: Sunrise Communications Holdings S.A.

....Outlook, Changed To Stable From Rating Under Review

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

Michael J. Mulvaney
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 Ba2 CFR to Sunrise Communications Group AG, (P)Ba2 ratings to new debt instruments; outlook stable
No Related Data.
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