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Rating Action:

Moody's assigns first-time B2 rating to EOLO; outlook stable

04 Oct 2021

Milan, October 04, 2021 -- Moody's Investors Service ("Moody's") has today assigned a first-time B2 corporate family rating (CFR) and a B2-PD probability of default rating (PDR) to Zoncolan Bidco S.p.A ("EOLO" or "the company"). Concurrently, Moody's has assigned a B3 rating to the €375 million senior secured notes due in 2028 issued by Zoncolan Bidco S.p.A. The outlook is stable.

On July 17 2021, Partners Group, a leading global private markets firm, acting on behalf of its clients, agreed to acquire a 75% stake in EOLO S.p.A for an enterprise value of approximately €1.3 billion (calculated for the entire 100%). Partners Group will acquire the 75% stake in EOLO from Searchlight Capital Partners, a vehicle controlled by Luca Spada, EOLO's founder and Chief Executive Officer. The remaining 25% will be owned by the vehicle controlled by Luca Spada, who will continue to act as EOLO's CEO.

The transaction is expected to be completed by the end of 2021 and will be funded through a combination of €910 million of shareholder funding (€683 million for the 75% stake) including €182 million of equity and €728 million of deeply subordinated shareholder loans, and the €375 million senior secured notes. The capital structure will also include a €125 million super senior secured revolving credit facility ("SSRCF") maturing in 6.5 years.

"EOLO's B2 rating reflects the supportive fundamentals of the Italian fixed wireless access ("FWA") market, EOLO's strong position in this segment and its solid track record of growth," says Ernesto Bisagno, a Moody's Vice President -- Senior Credit Officer and lead analyst for EOLO.

"However, the rating also factors in EOLO's modest scale and niche business focus, the exposure to technology risk, as well as its negative free cash flow after growth capex," adds Mr. Bisagno

The full list of assigned ratings can be found at the end of this press release.

RATINGS RATIONALE

The B2 CFR reflects (1) the supportive fundamentals of the Italian FWA market given the relatively low penetration of fiber in rural areas and the orography of the country; (2) EOLO's strong position in this segment; (3) its well invested infrastructure, increasing customer base and modest churn rate; (4) its track record of strong revenue growth and high EBITDA margin (as adjusted by Moody's); and (5) the material proportion of shareholder funding (around 70%) in EOLO's takeover.

The rating also reflects (1) EOLO's modest scale and niche business focus; (2) the exposure to technology risk; (3) the potential for increase in competition from other telecom service providers in Italy; (4) the extension risk of the existing spectrum licenses; (5) the high operating leverage owing to a high proportion of fixed costs; (6) the negative FCF generation after growth capex; and (7) its moderate leverage of around 4.5x.

EOLO reported stronger revenue growth over 2019-21 mainly driven by a material increase in the customer base, and to a lower extent, to modest ARPU improvement.

Although the company's Moody's adjusted EBITDA margin is high at around 50% at June 21, free cash flow (FCF) remained negative due to the significant capex spend. Nevertheless, cash flow before growth capex was positive and improved over 2019-21.

Moody's notes that the company's EBITDA calculation reflects the capitalization of network systems and customer premises equipment (CPE) costs, which are amortized over the useful life of the underlying assets. However, operating margins are significantly lower, in the low-mid-single digit range, resulting in a weak EBIT to interest expense ratio.

Moody's expects EOLO to report strong revenue growth of around 10%-15% each year, driven by the increase in customer base and stable ARPUs. The rating agency anticipates EBITDA to grow faster than revenue given the positive impact from operating leverage.

Despite stronger EBITDA, Moody's adjusted FCF will remain negative over 2022-23 at about €25 million - €35 million each year, due to a combination of high growth capex and the cash outflow associated with spectrum extension. From 2024 onwards, FCF will improve driven by a moderation in capex and ongoing earnings improvement. As a result, Moody's adjusted debt to EBITDA should remain at around 4.5x over 2022-23, and decrease towards 4.0x by 2024.

While the FWA technology is currently competing well against the other mobile and fixed technologies, EOLO operates in a competitive market and remains exposed to technology risk which mainly reflects potential increased competition from FTTH.

The 26GHz and 28GHz licenses originally awarded to EOLO in 2014 and 2018 will expire in December 2022, expose EOLO to license extension risks. However, EOLO has already submitted the request for the extension of its licenses and indicated it should receive the approval by the beginning of the next year. Based on precedents, Moody's expects that those licenses will be extended till 2029, and assume a 30% increase for the 28GHz, versus the original price.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

Moody's has factored into its decision to assign a B2 rating to EOLO the governance considerations associated with the company's financial strategy and risk management, as well as its concentrated ownership. The proposed capital structure includes a material equity component covering around two thirds of the total consideration, which suggests a balanced financial policy.

However, the company will be controlled by Partners Group, which, as is often the case in highly levered, private-equity-sponsored deals, could have a high tolerance for leverage. This is mitigated by the good revenue visibility and the fact that a material part of the capex programme includes growth (success-based) capex and could be curtailed if needed.

LIQUIDITY

EOLO's liquidity is adequate, with an initial cash balance of €41 million and access to a €125 million revolving credit facility maturing in 6.5 years with no financial covenants. However, because of the significant growth capex and the spectrum payment, Moody's expects the company to generate modest negative FCF between €25 million and €35 million each year over 2022-23, which will be funded through cash available on balance sheet and RCF utilization.

STRUCTURAL CONSIDERATIONS

The B3 rating of the senior secured notes is one notch below the CFR, reflecting its ranking behind the SSRCF, which has priority over the proceeds in an enforcement scenario under the Intercreditor Agreement.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that EOLO will continue to grow its revenues and earnings overtime and assumes that the company will be able to mitigate a potential increase in competition through a solid customer service proposition and ongoing technology upgrades.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward rating pressure in the next 12-18 months is unlikely but could develop if the company successfully delivers on its business plan, showing strong revenue growth as well as a sustainable improvement in EBITDA margins. Quantitatively, that would require Moody's adjusted debt/EBITDA to reduce towards 3.5x and Moody's adjusted free cash flow (FCF) turning positive.

Downward pressure on the ratings could develop if operating performance starts deteriorating, with Moody's adjusted debt/EBITDA increasing above 5.0x; if liquidity weakens; or if the company failed to extend the spectrum licenses.

LIST OF AFFECTED RATINGS

..Issuer: Zoncolan Bidco S.p.A.

.... Probability of Default Rating, Assigned B2-PD

.....LT Corporate Family Rating, Assigned B2

....Senior Secured Regular Bond/Debenture, Assigned B3

Outlook Actions:

....Outlook, Assigned Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017 and available at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Busto Arsizio (Italy), EOLO is a national telecommunications operator and market leader in the supply of ultra-broadband FWA services to the residential, business and wholesale sectors in Italy. EOLO offers FWA services in rural and suburban areas in Italy for residential and wholesale customers with speeds ranging from up to 30 Mbps in the basic package to 100Mbps in the premium package.

At June 2021, the company had 561 thousand subscribers and reported revenue of €198 million and EBITDA of €93 million (for the last twelve months ended June 21).

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Ernesto Bisagno, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
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 Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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