NOTE: On September 20, 2012, the press release was revised as follows: added missing disclosures after the sixth paragraph of the Regulatory Disclosures Section. Revised release follows:
Madrid, September 14, 2012 -- Moody's Investors Service has today changed to positive from stable
the outlook on the senior unsecured Baa2 and Prime-2 (P-2)
ratings of BT Group Plc (BT) and British Telecom Finance B.V.
RATINGS RATIONALE
"Changing the outlook to positive reflects our expectation that
BT's credit metrics will continue to improve over the medium term,
driven by a resilient operating performance, its focus on cash flow
generation to reduce debt, and its efforts in bringing its pension
deficit under control," says Iván Palacios, a
Moody's Vice President - Senior Credit Officer and lead analyst
for BT. "We believe that BT's strong track record in
executing its business plan and its conservative financial policies will
play a part in improving its credit metrics further," adds
Mr. Palacios.
BT continues to report a resilient operating performance, with consistent
growth in EBITDA over the past three years despite the challenging operating
environment, which is exerting pressure on the group's revenues.
While Moody's expects BT's revenues to continue declining
over the medium term, the rating agency notes that some of the revenue
lost is low-margin, while also deriving comfort from the
group's demonstrated capacity to cut costs in order to improve margins,
to be sustained into the future.
Moody's expects that BT's operating performance will benefit
from rising consumer demand for bandwidth capacity. In order to
defend its strong market position from cable competition and the threat
of mobile broadband, BT is successfully increasing its fibre footprint
while upgrading its content through TV bundles and acquiring premium sports
rights.
Going forward, BT is also likely to benefit from some of the favourable
structural features of the UK market compared with other European countries,
such as relatively stronger GDP growth prospects, better demographics
and price inflation in its telecom sector.
Nevertheless, Moody's cautions that the sustained decline
in revenues is a concern given that there is no visibility as to when
this trend will reverse. If this trend accelerates over time,
the company's ability to continue cutting costs to mitigate pressure
on cash flow might be challenged.
BT has a conservative financial policy aimed at balancing shareholder
remuneration with bondholder protection. Given BT's stable
cash flow generation and a predictable dividend policy, which promises
10%-15% growth in dividends per share over the next
three years, Moody's expects that the group will use excess
cash to reduce its GBP9.1 billion of reported net debt (as of June
2012). As a result, the rating agency would expect BT's
key credit metrics to strengthen over time such that adjusted retained
cash flow (RCF)/adjusted net debt raises sustainably above 25%,
and adjusted total debt/EBITDA falls sustainably below 2.5x.
These ratio levels are consistent with a Baa1 rating for BT, the
medium-term rating target stated in the group's financial
policies.
The improvement in BT's adjusted credit metrics will also benefit
from structural improvements in the group's pension deficit position.
Such structural changes include the use of the Consumer Prices Index (CPI),
rather than Retail Prices Index (RPI), which reduced BT's
pension deficit by around GBP2.9 billion as at September 2010,
and the GBP2 billion extraordinary contribution that the group made to
its pension plan in March 2012. These changes helped to reduce
BT's pension deficit to GBP2.5 billion as of June 2012 from
the GBP7.9 billion reported in FY March 2010.
BT's Baa2 rating reflects the group's position as the largest
communications service provider to the residential and business markets
in the UK. The rating also takes into consideration BT's
strong underlying operating performance, particularly the substantial
improvement in the group's EBITDA margin. These improvements
continue to support BT's free cash flow generation, ongoing
debt reductions and an amelioration in financial metrics. However
the rating also reflects the group's lack of a mobile business,
the impact of deregulation and competition on the group's market
position and BT's large and volatile accounting pension deficit
which remains a drag on the group's credit metrics.
The positive outlook incorporates Moody's expectation of a continued
improvement in BT's credit metrics and leverage reduction.
WHAT COULD CHANGE THE RATING UP/DOWN
Upward rating pressure could develop over the next 18 months if BT demonstrates
that it can sustainably maintain an adjusted RCF/net adjusted debt ratio
of more than 25%, an adjusted total debt/EBITDA ratio below
2.5x and solid free cash flow metrics. Better visibility
as to the reversal of the declining trend in revenues would also support
upward pressure on the rating.
Downward pressure on the rating is unlikely given the positive outlook.
However, the outlook could be stabilised if the expected improvement
in credit metrics is delayed as a result of competitive, regulatory
or macroeconomic pressures, leading to ratios such as adjusted RCF/net
adjusted debt in the 20-25% range and adjusted total debt/EBITDA
in the 2.5x-3.5x range. Downward rating pressure
could emerge if BT's cash flow measures weaken as a result of operating
performance shortfalls. Specifically, negative rating pressure
could result from BT's adjusted RCF/net adjusted debt ratio declining
towards 20%, or its adjusted total debt/EBITDA ratio moving
towards 3.5x, combined with the group failing to deliver
sustainable positive free cash flow.
PRINCIPAL METHODOLOGY
The principal methodology used in rating BT Group Plc was the Global Telecommunications
Industry Methodology published in December 2010. Please see the
Credit Policy page on www.moodys.com for a copy of this
methodology.
BT Group Plc, which operates principally through its 100%-owned
subsidiary British Telecommunications plc, is the leading provider
of local, long-distance and international telecommunications
services in the UK and one of the world's leading providers of communication
solutions and services, operating in 170 countries. In the
year ended 31 March 2012, BT Group plc reported revenue of GBP19.3
billion and EBITDA of GBP6.1 billion.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant 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 relevant 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.
The ratings have been disclosed to the rated entities or their designated
agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings 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.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entities or their related third parties within
the two years preceding the credit rating action. Please see the
special report "Ancillary or other permissible services provided
to entities rated by MIS's EU credit rating agencies" on the
ratings disclosure page on our website www.moodys.com for
further information.
Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B)further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time before Moody's 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 our website www.moodys.com for further information.
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.
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 changes outlook on BT ratings to positive from stable
