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Rating Action:

Moody's changes Vivacom's outlook to positive

26 Jul 2017

London, 26 July 2017 -- Moody's Investors Service ("Moody's") has today changed to positive from stable the outlook on the ratings of Bulgarian Telecommunications Company EAD ("Vivacom"). Concurrently, Moody's has affirmed the company's B1 corporate family rating (CFR), its B1-PD probability of default rating (PDR), and the B1 rating on the company's EUR400 million senior secured notes due 2018.

"The change in outlook to positive reflects Vivacom's track record of solid operating cash flow generation and modest leverage, as well as its more conservative financial policies, as the company has recently reduced its reported leverage target to below 2.5x, from 3.0x," says Alejandro Núñez, a Moody's Vice President -- Senior Analyst.

A full list of affected ratings can be found at the end of this Press Release.

RATINGS RATIONALE

Vivacom's B1 ratings reflect: (1) the company's position as a leading telecom operator in Bulgaria with strong market shares in fixed-line telephony and fixed-line broadband; (2) Vivacom's strong track record of growing its mobile segment's market share and revenues; (3) the company's modest leverage with Moody's adjusted Gross Debt / EBITDA expected around 2.7x at year-end 2017; (4) its diversified business model, with offers in fixed-line voice, broadband internet, mobile and pay-TV; (5) expectations of improved free cash flow generation in the coming years supported by EBITDA growth, reduced working capital outflows due to lower receivables and predictable capex spending.

The rating also reflects: (1) the company's relatively small scale in the global telecommunications industry compared with peers as a result of its limited geographical focus in Bulgaria; (2) the competitive telecom market landscape in Bulgaria and its resulting low Average Revenues Per User (ARPU) generated as well as potential payments in upcoming mobile spectrum auctions; (3) continuous revenue pressure as a result of the structural decline in fixed-line voice services and price pressures in the corporate/small enterprises segment; (4) the potential for a change in the Viva Telecom shareholding structure, which is subject to existing litigation cases at the level of holding companies outside the Vivacom restricted group; (5) the overhang resulting from the EUR240 million debt sitting at Viva Telecom (Luxembourg), the 100% owner of Vivacom, which is mitigated by the strong covenant package and restricted payments limitations in Vivacom's debt documentation; and (6) the need to address the refinancing of the company's EUR400 million senior secured notes due November 2018, for which the company is already exploring financing plans.

Moody's expects that after 2018, Vivacom's capex spend will decline on both an absolute basis and relative to revenues, such that capex/revenues will be under 20% in 2019, following two years of elevated investments in the national 4G network. As a result, the rating agency anticipates that Vivacom will generate increasing operating and free cash flow, relative to 2015-2016 levels, while maintaining an adequate level of network reinvestment to support its future growth and competitiveness.

Vivacom has also proven its adherence to a conservative financial policy over the past two years and has recently reduced its financial leverage target to a range of 2.0-2.5x net debt/EBITDA (company-reported) from 3.0x previously. Moody's anticipates that Vivacom's reported net leverage will be toward the higher end of that range at year-end 2017 before declining toward the lower half of that target range in 2018.

RATIONALE FOR POSITIVE OUTLOOK

The change in outlook to positive from stable primarily reflects the improvement in operating cash flow generation over the past two years, which Moody's anticipates will rise over the next two years, and the expectation that leverage will continue to remain modest, at around 2.7x over the next two years, below the 3.0x threshold for a possible upgrade to Ba3. This is further supported by the company's recent change in leverage target, which was reduced to a range of 2.0x-2.5x Net debt/EBITDA (company-reported), from 3.0x prior to 2016.

The positive outlook reflects Moody's expectation that Vivacom will continue its steady operating momentum, moderate leverage and adherence to its 2.0x-2.5x net debt/EBITDA leverage target. It also reflects the expectation that Vivacom will successfully refinance its eurobond maturing in November 2018 well ahead of maturity.

WHAT COULD CHANGE THE RATING UP / DOWN

Upward pressure on the rating could develop if the company's adjusted leverage remains below 3.0x on a sustained basis, while it generates meaningful positive free cash flow.

Downward pressure on the ratings could arise should Vivacom's operating performance weaken or should the company incur additional indebtedness, such that its adjusted leverage ratio moves towards 4.0x. Negative ratings pressure would also arise should the company's free cash flow generation deteriorate leading to a weakening in the company's liquidity profile. Failure to address the refinancing of the November 2018 bond maturity on a timely manner would also lead to downward pressure on the rating.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Bulgarian Telecommunications Company EAD

....LT Corporate Family Rating, Affirmed B1

....Probability of Default Rating, Affirmed B1-PD

....Senior Secured Regular Bond/Debenture, Affirmed B1

Outlook Actions:

..Issuer: Bulgarian Telecommunications Company EAD

....Outlook, Changed To Positive From 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.

Bulgarian Telecommunications Company EAD ("Vivacom") is the national telecom incumbent and leading integrated operator in Bulgaria (Baa2 stable), providing mobile, fixed-line telephony, fixed-line broadband and pay-TV (both DTH and IPTV) services nationwide. Vivacom is a fully integrated operator that offers quadruple-play services nationwide in Bulgaria and benefits from its leading position in fixed-line telephony business with a 82% revenue share and the largest player in fixed-line broadband with a 26% subscriber market share (as of December 2016). In addition, Vivacom is Bulgaria's third-largest mobile operator (28% revenue market share as of March 2017), providing post-paid services to both residential and business customers and pre-paid services to residential customers with a total of 3.1 million subscribers. In its fiscal year 2016, the company generated total revenue of BGN875.3 million (EUR447.5 million, at a Bulgarian lev pegged to the Euro at BGN1.95583/EUR) and company-adjusted EBITDA of BGN310.6 million (EUR158.8 million). As of March 2017, Vivacom's revenue mix was 57% mobile, 15% fixed voice, 11% fixed data, 8% pay-TV and 9% other telecommunications services.

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.

Alejandro Nunez
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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 Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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