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Rating Action:

Moody's confirms Tele Columbus' B3 ratings; outlook stable

02 Jul 2021

Madrid, July 02, 2021 -- Moody's Investors Service ("Moody's") has today confirmed Tele Columbus AG's ("Tele Columbus") B3 corporate family rating (CFR), B3-PD probability of default rating (PDR), and the B3 ratings on the outstanding €462 million senior secured bank credit facilities due 2024 and €650 million guaranteed senior secured notes due 2025. The outlook has been changed to stable from ratings under review.

This rating action concludes the review for upgrade initiated by Moody's on 23 December 2020, following a takeover bid by Kublai GmbH ("Kublai") that concluded in April 2021, and the €475 million equity rights issue in May 2021.

"We now expect that the company will need more investments than initially anticipated in order to improve its competitive position and successfully execute its Fiber Champion strategy," says Agustin Alberti, a Moody's Vice President -- Senior Analyst and lead analyst for Tele Columbus.

"As a result, adjusted leverage will exceed 6.0x at least over the next 2 years and deleveraging will be slower than expected, removing the potential near term upward pressure on the B3 rating," adds Mr Alberti.

A full list of affected ratings is provided at the end of the press release.

RATINGS RATIONALE

In April 2021, Kublai became the main shareholder of the company with an equity stake of around 92% following a voluntary public takeover offer. In May 2021, the company announced [1] the completion of a €475 million capital increase, fully guaranteed by Kublai, which increased its shareholding to above 94%. Proceeds from the capital increase were used to repay €360 million of debt and to pay transaction fees, while the remaining cash will be used to fund capex for the implementation of its Fiber Champion strategy. Kublai has also agreed to make available additional equity capital of up to €75 million over the next 2 years. Moreover Kublai issued a statement on 25 June regarding its intention to delist Tele Columbus in due course.

Moody's now expects that the positive impact on credit metrics derived from the debt reduction with proceeds from the capital increase will be offset by the negative impact caused by increased investments to ensure the successful execution of the Fiber Champion strategy. As a result, Moody's expects that the company's adjusted debt/EBITDA ratio will exceed 6.0x, the threshold for upward pressure on the rating, until at least 2022.

In May 2021, the German government approved a new telecoms law. As per the new law, the current practice of including basic TV fees in rental costs (around €8-€10 per month) will be discontinued for all new housing association contracts and from July 2024 for all existing contracts. The new transition period until July 2024 is longer than the two years initially envisaged, which should provide enough time to shift from existing bulk TV contracts to individual contracts. However, retaining TV customers will become more challenging given the increasing consumption of TV platforms at the expense of linear TV, mitigated by the fact that the company has already a premium TV offer.

The rating agency believes that the implementation of the "Fiber Champion" strategy is key to the sustainability of Tele Columbus' business model. The upgrade of its current network footprint from coaxial to FTTB/H, as well as opening the network to other telecom operators will provide an attractive value proposition to housing association landlords and tenants. Growth from retail and wholesale broadband, as well as B2B opportunities should more than compensate for the decline in TV revenues.

Tele Columbus' B3 CFR reflects (1) its solid market position, especially in its core regions of eastern Germany; (2) its long-standing customer relationships with housing associations; (3) the credible "Fiber Champion" strategy, based on the modernisation of the network from coaxial to FTTB/H and an open access model, enhancing the sustainability of its business model; (4) the growth opportunities in the broadband wholesale and B2B markets; and (5) the financial flexibility provided by the recent capital increase and further equity injection committed by Kublai.

The rating also reflects (1) its relatively small scale compared with that of its rated peers; (2) the continued high competition from other telecom and cable operators, particularly in the housing association segment, which accounts for more than 90% of Tele Columbus' end customers; (3) a declining legacy cable TV business, accounting for 48% of total revenues in 2020, exacerbated by recent regulatory changes and increasing customer viewership of streaming TV platforms; (4) the execution risks of the "Fiber Champion" plan, including potential delays or operational issues associated with the network upgrade; (5) its high Moody's adjusted gross leverage of between 6.0x-7.0x over the next 12-18 months; and (6) its high capital spending requirements, which will lead to negative free cash flow over the next 4 years and will constrain deleveraging.

LIQUIDITY

Following the capital increase and associated debt repayments, Moody's estimates that the company has cash balance of around €150 million. Moody's assessment of Tele Columbus' adequate liquidity to cover its needs over the next 12 to 18 months factors in Kublai's commitment to further inject €75 million to fund the discretionary capex growth plan, which is mostly discretionary and could be curtailed if needed.

While the company will not have any large debt maturities until 2024 when the term loan matures, Moody's expects Tele Columbus to be free cash flow negative until at least 2025 and the company does not currently have access to a revolving credit facility.

STRUCTURAL CONSIDERATIONS

Tele Columbus' probability of default rating is B3-PD, in line with the CFR. The company's capital structure comprises an outstanding €462 million term loan (maturing in 2024), and a €650 million senior secured bond (maturing in 2025).

The B3-rated bond benefits from the same security and guarantee structure as the B3-rated bank debt. All of Tele Columbus' debt is secured against share pledges of key operating subsidiaries and benefits from guarantees from operating entities accounting for 80% of group EBITDA/90% of group assets.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that the company (1) will continue to improve its operations and network, translating into a more sustainable business profile, (2) will be able maintain adequate leverage levels, and (3) will manage its liquidity in a prudent manner.

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

Upward rating pressure could arise if: (1) the company continues to show improvement in its operating metrics, including growth in the overall number of customers; (2) returns to sustained revenue and EBITDA growth; and (3) maintains Moody's-adjusted gross debt/EBITDA below 6.0x on a sustained basis and generates positive FCF (after capital spending and dividends).

The ratings could be downgraded if (1) Tele Columbus' Moody's-adjusted gross debt/EBITDA leverage deteriorates and remains above 7.0x on a sustained basis; (2) the execution of the turnaround plan is unsuccessful, such that the business fails to return to growth; or (3) its liquidity deteriorates.

LIST OF AFFECTED RATINGS

..Issuer: Tele Columbus AG

Confirmations:

.... Probability of Default Rating, Confirmed at B3-PD

....LT Corporate Family Rating, Confirmed at B3

....Senior Secured Bank Credit Facilities, Confirmed at B3

....Senior Secured Regular Bond/Debenture, Confirmed at B3

Outlook Action:

....Outlook, Changed To Stable From Rating Under Review

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Pay TV published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1134554. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Tele Columbus AG is a holding company, which through its subsidiaries offers basic cable television services (CATV), premium TV services and, where the network is migrated and upgraded, internet and telephony services in Germany. It is the second largest cable operator in terms of homes connected in Germany with 3.3 million. In 2020, Tele Columbus reported revenue of €480 million and EBITDA of €233 million (including IFRS16).

Headquartered in Berlin (Germany), the company is listed in the German stock exchange and is majority-owned by Kublai, an investment vehicle owned by Morgan Stanley Infrastructure Partners and United Internet, with a 94.4% equity stake.

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.

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.

REFERENCES/CITATIONS

[1] Company press release 12-May-2021 https://www.telecolumbus.com/en/investor-relations/financial-news/?newsid=2091503

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.

Agustin Alberti
Vice President - Senior Analyst
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
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 Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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