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Rating Action:

Moody's assigns a long-term issuer rating of Ba3 to eAccess

 The document has been translated in other languages

09 Mar 2011

First-time ratings

Tokyo, March 09, 2011 -- Moody's Japan K.K. has assigned a Ba3 long term issuer rating to eAccess Ltd (eAccess). It also has assigned a (P)Ba3 rating to senior unsecured bond guaranteed by eMobile, subsidiary. The outlook for both ratings is stable.

The rating on the bond is provisional and represents Moody's preliminary opinion only. Upon a conclusive review of the final documentation, Moody's will endeavor to assign a definitive rating to the bond. A definitive rating may differ from a provisional rating.

RATING RATIONALE

eAccess's Ba3 long-term issuer rating incorporates the company's competitive position in its core market, high business risk, and weak balance sheet. It also incorporates a subordination factor of one notch down due to the company's large amount of secured debt.

eAccess's market position in the Japanese telecom industry is marginal, and its financial strength pales in comparison to Japan's large telecoms operators. However, it maintains strong positions in its core markets, about 24% in the ADSL market and 40% in the mobile broadband market (mobile broadband market led by three major carriers -- eAccess, NTT DoCoMo, Inc.(Aa1, Negative), and UQ Communications Inc.( not rated by Moody's).

The main contributor to overall earnings growth will be the mobile broadband business operated by subsidiary eMobile. Although the market comprises a small portion of the mobile telecoms industry, it is expanding due to rapidly growing demand for mobile broadband services-- an area in which the company is a pioneer, as it is especially strong in Data card (USB-type data communication cards) and Pocket WiFi (mobile WiFi router).

The mobile broadband market is becoming increasingly competitive, as other carriers' make full-scale entries, although eAccess's cost competitiveness and network capacity will allow the company to maintain its market position.

At the same time, eMobile has entered the fast-growing smartphone market, but larger carriers are also focusing on this market. eAccess may be able to expand the business given the rapid growth in demand and management's agility, but the pace of growth is questionable and the environment is becoming ever more competitive. The larger rivals' shift to a faster network infrastructure may allow them to become more aggressive in markets where eAccess is strong -- in which case, eMobile may face a more competitive environment.

The ADSL business will shrink gradually due mainly to the migration to optic fiber service, but will support overall cash flow, given the company's flexible cost structure and its ability to manage costs in line with revenue. The migration to FTTH has accelerated in urban areas, but the pace in rural areas is quite slow. The capex required for this business, however, will be very low.

Most of eAccess's capex hereafter will be for the mobile broadband business. Although it will be efficiently managed, capex for the network may fluctuate, depending on plans for LTE (Long Term Evolution) and licenses for the new spectrum.

The company's high leverage stems from the initial capex to roll out the mobile broadband business. eAccess is projecting adjusted debt/EBITDA higher than 4x and debt/capitalization at 80% for end-FYE 3/2011. Moody's expects that the company will pay down its debt with free cash flow. Improvements to leverage will depend largely on the growth of earnings and cash flow in the mobile broadband business.

However, a significant amount of the company's debt is secured debt -- which brings the rating down by one notch. Moody's understands that refinancing will bring the amount of secured debt down to about 50% of total debt. On the positive side, eAccess plans to merge with eMobile on March 31, 2011. The merger will put an end to the structural subordination between the parent and the subsidiary, which is already incorporated in Moody's rating.

Many of Moody's corporate ratings in Japan incorporate a notch up due to the country's support system. However, eAccess's final ratings include no uplift from its fundamental ratings, given the company's limited scale and its short-term business relationships with banks (due to its short corporate history).

The stable outlook is based on Moody's expectations that eAccess will maintain the competitiveness of its core businesses and its financial profile will continue to improve in the coming years. Moody's expects that the ratios will improve to about 3.0x and about 75% in the coming years, due to the growth of earnings from mobile broadband business.

If eAccess's financial ratios (including leverage) do continue to improve, as a result of growing market share and earnings in the mobile broadband business as well as the ongoing profitability of ADSL, and the company maintains its liquidity, the rating will see upward pressure.

For instance, if adjusted debt/EBITDA improves to and remains at about 2.5x, and adjusted debt/book capitalization ratio, to around 70%, and if adjusted EBITDA margin remains above 35%, the rating may be upgraded. If a significant portion of the secured loan is paid down or refinanced with an unsecured loan, the rating may also see upward pressure.

However, if the competitiveness of the mobile broadband business deteriorates or if the ADSL market shrinks and profitability declines significantly, or if leverage does not improve, the rating will see downward pressure. Lower profitability or earnings due to tougher competition may also cause negative pressure.

For instance, if adjusted debt/EBITDA remains above 3.5x, and adjusted debt/book capitalization ratio, above 80%, or if adjusted EBITDA margin declines below 25%, the rating may be downgraded. Also, any large M&A financed by debt, or a significant return to shareholders, or significant increase in capital expenditures -- any of which may impact the company's cash flow or capital structure -- as well as deterioration in liquidity, will be negative for its rating.

The principal methodology used in this rating was Moody's "Global Telecommunications Industry," published on February 15, 2011, and available at www.moodys.co.jp.

eAccess Ltd., headquartered in Tokyo, is an ADSL and the mobile broadband service provider.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's information.

Measures taken to ensure the quality of this information include use of public information, reviews by a third party and verification by the lead analyst.

Moody's considers the quality of information available on the issuer or obligations satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Credit ratings are Moody's current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. Moody's defines credit risk as the risk that an entity may not meet its contractual, financial obligations as they come due and any estimated financial loss in the event of default. Credit ratings do not address any other risk, including but not limited to: liquidity risk, market value risk, or price volatility. Credit ratings do not constitute investment or financial advice, and credit ratings are not recommendations to purchase, sell, or hold particular securities. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such rating or other opinion or information is given or made by Moody's in any form or manner whatsoever. The credit risk of an issuer or its obligations is assessed based on information received from the issuer or from public sources. Moody's may change the rating when it deems necessary. Moody's may also withdraw the rating due to insufficient information, or for other reasons.

Moody's Japan K.K. is a credit rating agency registered with the Japan Financial Services Agency and its registration number is FSA Commissioner (Ratings) No. 2. The Financial Services Agency has not imposed any supervisory measures on Moody's Japan K.K. in the past year.

Please see ratings tab on the issuer/entity page on the Moody's website for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on the Moody's website for further information.

Please see the Credit Policy page on the Moody's website for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Tokyo
Tadashi Usui
Vice President - Senior Analyst
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Tokyo
Shinsuke Tanimoto
Senior Vice President - Team Leader
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's assigns a long-term issuer rating of Ba3 to eAccess
No Related Data.
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