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Announcement:

Moody's changes the Outlook on Invitel's ratings (B2 CFR) to Negative

Global Credit Research - 02 Feb 2011

London, 02 February 2011 -- Moody's has today changed the Outlook on Magyar Telecom B.V.'s (Invitel) ratings to negative from stable.

The change in outlook reflects Moody's view that Invitel's operating and financial performance have been further challenged in 2010 by (i) the prolonged downturn in Hungary and (ii) continuing strong competitive pressures exercised by the incumbent telecom operator and the main cable players in the country.

At the same time, the B2 CFR continues to reflect (i) the company's overall sound profitability levels - close to 50% reported EBITDA margin - and (ii) Invitel's resulting positive free cash flow profile.

In the first nine months of 2010, group revenues declined by 9% year-on-year (in local currency terms), mainly driven by the decline in voice services as line churn continues and cross-segment customers migrate to lower cost packages. In addition Moody's notes that growth from broadband Internet services has been weaker than previously anticipated, showing low single-digit growth rate in the subscriber base and an average revenue per user continuing to decline.

In October 2010, Invitel disposed of its International wholesale activities outside Hungary for approximately EUR200 million net proceeds to focus its business strategy towards the Hungarian market. Whilst part of the proceeds were used to reduce the company's indebtedness, Moody's notes that Invitel recently acquired a medium-sized cable player in Hungary (Fibernet), out of a fragmented cable market. Moody's views Invitel's current business profile and market position as one that is likely to remain vulnerable to competition, mainly driven by triple-play offerings from the largest cable players and sees limited growth prospects for the company going forward.

Moody's notes that in Q4 2010, the Hungarian government passed a law to levy extra taxes on a number of industries including telecommunications, based on a percentage of revenue formula. Invitel is therefore expected to pay an estimated EUR35 million in total over 3 years starting in 2010. Whilst expected to reduce Invitel's cash flow generation capacity and financial flexibility, Moody's expects the company to (i) continue to generate positive cash flows in the future and (ii) pursue debt reductions by way of debt buybacks (and subsequent cancellations) at around par, using the remainder of Invitel International's sale proceeds such that group leverage will remain closer to 3.0x Debt to EBITDA.

The use of cash to reduce debt is expected to result in a liquidity profile that does not leave ample flexibility to accommodate further unexpected cash calls. The next material scheduled debt repayment is for the EUR 100 million FRNs due in April 2013.

A further deterioration in operating performance reducing the company's EBITDA and free cash flow generation combined with a weaker liquidity profile could lead to a downgrade of Invitel's ratings. The current rating and outlook does not allow for any further extraordinary taxation imposed by the Government.

Whilst Invitel's ratings are currently constrained by the company's relatively limited financial flexibility, the outlook could stabilise following tangible signs of a stabilizing market environment, combined with meaningful growth in Internet and broadband, and sustained free cash flow generation.

The last rating action was implemented on 07 December 2009, when Moody's assigned a provisional (P)B1, LGD4/54% rating to the proposed EUR340 million senior secured notes to be issued by Magyar telecom B.V. and the company's CFR was upgraded to B2 from B3, with a stable outlook.

The principal methodology used in rating of this issuer was Global Telecommunications Industry updated in December 2010.

Headquartered in Budaors, Hungary, Invitel is the second-largest fixed-line telecommunications provider in Hungary. Invitel is 100% owned by Mid-Europa Partners.

London
Alexis Foret
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Chetan Modi
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
One Canada Square
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes the Outlook on Invitel's ratings (B2 CFR) to Negative
No Related Data.
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