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Rating Action:

Moody's changes the outlook on Digi's ratings to stable from positive

19 Jun 2018

London, 19 June 2018 -- Moody's Investors Service ("Moody's") has today changed to stable from positive the outlook on Digi Communications N.V. ("Digi" or "DCS"), the parent company for RCS & RDS S.A. ("RCS&RDS"), a leading pay- TV and communications services provider in Romania and Hungary. Concurrently, the agency has affirmed the B1 corporate family rating (CFR), B1-PD probability of default rating and the B1 senior secured debt rating at DCS.

Moody's decision to change DCS' ratings outlook to stable from positive reflects (1) the increase in the leverage at DCS due to the recent debt-financed acquisition of Invitel Távközlési Zrt (Hungarian subsidiary of telecom provider Invitel Group) for €135.4 million, although scheduled debt amortizations and EBITDA growth will likely support future de-leveraging absent further debt financed acquisitions or material shareholder returns; (2) the expectation of negative or marginally positive free cash flow generation in 2018 and the lack of publicly defined medium-term financial policy leverage ratio target; as well as (3) the prolonged uncertainty associated with the resolution of the bribery and money laundering accusations facing DCS and some of its senior management representatives.

"While DCS' leverage remains close to the boundaries defined for a ratings upgrade, the deleveraging process will be slower than originally expected due to Invitel Távközlési Zrt's debt-financed acquisition and so far there has been no evidence of positive free cash flow generation due to continued high capex. The stable outlook on the rating reflects that DCS is well positioned in the rating category, with some headroom for deviation in the event of operating underperformance," says Gunjan Dixit, a Moody's Vice President - Senior Credit Officer and lead analyst for DCS.

A full list of ratings affected by this rating action can be found at the end of this press release.

RATINGS RATIONALE

DCS' B1 corporate family rating continues to reflect (1) the company's smaller size relative to rated peers in Europe; (2) its concentration in Romania notwithstanding some geographical diversification and exposure to emerging market risks; (3) de-leveraging largely reliant on EBITDA growth until the company returns to material free cash flow generation; and (4) the company's reduced yet some exposure to foreign exchange risks.

More positively, the rating also reflects (1) RCS&RDS's strong market positions within the Romanian cable TV and internet markets; (2) its track record of RGU growth; (3) competitive benefits from its modern network; (4) the company's access to attractive premium programming; and (5) intensification of the company's revenue growth momentum over the last couple of years primarily helped by the increase in lower-margin mobile business in Romania.

Over the past years, Digi has been growing its revenues strongly in the high single digits. However, Moody's expects Digi's organic revenue growth rate to reduce to around 3-4% in future years driven by market maturity, although Invitel Távközlési Zrt's acquisition will continue to support high single digit reported revenue growth in 2018/19. In Q1 2018, Digi has evidenced year-on-year reduced revenue growth of 2.7% driven by the impact of the much lower revenues from handsets as a consequence of the change made by Digi in the commercial offering of handsets from the end of Q1 2017. Company 'adjusted' EBITDA margin in Q1 2018 has nevertheless seen a year-on-year improvement (to 33.3% vs. 28.7%) mainly due to the mobile business profitability catch up and the almost neutral impact of the energy activity in the current period in Romania. The company's capex has been higher than Moody's expectations in 2017 (at 26.5% of revenues) and also in Q1 2018 (at 33% of revenues) leading to continued constrained free cash flow generation.

The Romanian telecommunications market will likely witness consolidation following the acquisition announcement in May 2018 of UPC Holding B.V.'s (Ba3, negative) business in Romania by of Vodafone Group plc (Baa1, RUR-down), amongst other Central and Eastern European business of Liberty Global plc (Ba3 stable). If this deal successfully closes in 2019 then the competitive landscape for Digi could become more challenging. Furthermore, there could be potential for further consolidation in the market which creates future uncertainty. Digi may also need to pay for mobile spectrum acquisition in the future but the company has not achieved free cash flow generation so far. There is also limited clarity on the level of future dividends should there be sustained free cash flow generation in the business.

Despite good EBITDA growth, Moody's adjusted gross debt/ EBITDA for DCS has reached around 3.6x as of Q1 2018 (pro-forma for Invitel Távközlési Zrt's acquisition and the associated debt increase) compared to 3.3x, prior to the debt-financed acquisition of Invitel Távközlési Zrt. While DCS' should remain on path to de-leveraging in the absence of further debt-financed acquisitions or material shareholder returns facilitated by scheduled debt repayments and EBITDA growth, Moody's cautiously recognizes that the company lacks a publicly defined medium-term financial policy leverage ratio target. The debt covenants allow for additional debt incurrence limiting the company's ability to incur and assume debt and/or require it to maintain a total leverage ratio of at or below 3.75x (this ratio stood at 2.6x at the end of Q1 2018) up to June 2019, when the covenant drops to 3.25x.

Moody's considers Digi's current liquidity profile as somewhat weak yet adequate. As of 31st March 2018, DCS had a cash balance of only €16 million. This cash, together with cash generated from operations and reliance on the €179 million of syndicated facility raised in Q12018, should be adequate to cover the company's business needs over the next 12-18 months. €135.4 million of the €179 million of syndicated facility is used to fund the acquisition of Invitel Távközlési Zrt while rest will be used for general corporate purposes during 2018. Besides the scheduled term-loan amortizations, the company's next relevant maturity is in 2019 when its fully drawn RON revolving credit facility of around €35 million equivalent falls due. Moody's would expect Digi to re-finance this RCF in a timely manner to ensure ample liquidity buffer. This is followed by the maturity of the 2021 RON bank debt facilities A1 and A2 (of over €300 million equivalent as of Q12018). In October 2023, the company will have to repay €350 million worth of senior secured notes. These notes are also callable from October 2019 onwards. Moody's would expect the company to pro-actively address all of its liquidity needs.

RATIONALE FOR STABLE OUTLOOK

The stable rating outlook reflects Moody's expectation that DCS will continue to maintain (at least) stable EBITDA margin, grow its revenues modestly, and maintain credit metrics in line with the parameters defined for the B1 rating.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the rating could develop if (1) DCS delivers on its business plan, such that its debt/EBITDA ratio (as adjusted by Moody's) remains well below 3.5x; (2) the company generates positive free cash flow (after capex and dividends) on a sustained basis; (3) the bribery and money laundering accusations facing DCS and some of its senior management representatives are resolved without being detrimental to the business; and (4) a track record of proactive liquidity management.

Conversely, downward pressure could be exerted on the rating if DCS's operating performance weakens such that its debt/EBITDA ratio (as adjusted by Moody's) rises towards 4.5x and the company generates negative free cash flow on a sustained basis. A weakening of the company's liquidity profile (including a reduction in headroom under financial covenants) could also lead to downward pressure on the rating.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Pay Television - Cable and Direct-to-Home Satellite Operators published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Digi Communications N.V.

....Corporate Family Rating, Affirmed B1

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

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

Outlook Actions:

..Issuer: Digi Communications N.V.

....Outlook, Changed To Stable From Positive

Digi Communications N.V. is the parent company of RCS&RDS S.A., a leading pay- TV and communications services provider in Romania and Hungary. The company successfully completed an IPO in May 2017 and is listed on the Bucharest Stock Exchange. It generated revenues of €917 million and reported EBITDA of €288 million in 2017. DCS is ultimately controlled by Romanian entrepreneur Zoltan Teszari, president of the board and founder of the company.

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.

Gunjan Dixit
VP - Senior Credit Officer
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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