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Global Credit Research - 02 Sep 2010
Madrid, September 02, 2010 -- Moody's Investors Service has today downgraded to B3 from B2 the
corporate family rating (CFR) and probability-of-default
rating (PDR) of ERC Ireland Finance Ltd ("ERCIF"), an
indirect parent company of eircom Group Ltd ("eircom").
At the same time, Moody's has downgraded the following ratings
to Caa2 from Caa1: (i) ERCIF's EUR350 million worth of senior
unsecured notes due in 2016; and (ii) the EUR350 million second-lien
term loan of ERC Ireland Holdings Ltd ("ERCIH"). The
rating of ERCIH's EUR3.3 billion senior secured facility
was downgraded to B2 from B1. The outlook on the ratings is negative.
"Today's downgrade reflects Moody's concerns about the
likelihood of a covenant breach within the next 12 months, coupled
with the lack of clarity regarding the company's plans to resolve
the short-term covenant issue and the long-term financial
strategy of the company," says Iván Palacios,
a Moody's Vice President -- Senior Analyst, and lead
analyst for the company.
In its Q4 2009/10 results, eircom acknowledged that it may breach
covenants under its existing facilities within the next 12 to 18 months,
given that the company has high levels of debt and its covenants tighten
over the next few quarters.
In the year ending June 2010, eircom's revenues showed a declining
trend. In addition, the company's reported consolidated
EBITDA fell by EUR16 million (2.3%), with stability
in its fixed-line business offset by a decline in its mobile division.
In Moody's view, the very challenging operating conditions
that eircom is facing are unlikely to change in the short term.
Despite management's success in reducing eircom's cost base
in order to maintain EBITDA in light of declining revenues, and
savings in capex to increase free cash flow generation, Moody's
believes that the company's EBITDA will continue to decline,
which could lead to a covenant breach in the quarter ending June 2011.
The company has appointed financial advisors to assess its options regarding
its covenants and long-term financial strategy. These options
could include a covenant reset and/or an equity cure. Nevertheless,
no timing has been given for the finalisation of these discussions and
all options are being considered at this stage. Moody's believes
that the prior B2 CFR was inconsistent with the high likelihood of a covenant
breach in the short term and the current level of uncertainty regarding
the options that eircom is assessing.
Moody's also notes that eircom's strategic shareholders,
STT Communications and the ESOT, have not yet given any public indication
of their intentions regarding the company's longer-term capital
structure or plans to inject equity into the business in order to avoid
a covenant breach.
It is Moody's expectation that, in the absence of other capital
structure measures, eircom's adjusted leverage will remain
around 5.5x in financial year (FY) 2010/11, a similar level
as that reported in FY 2009/10. Adjusted leverage excludes the
PIK instrument issued by ERC Ireland Preferred Equity Limited ("ERCIPE"),
as ERCIPE does not have a strict creditor claim on the restricted group
and the tight indenture covenant package of the acquisition facilities
prevents cash leakage from the restricted group.
The company's debt instruments, and particularly the EUR350
million worth of floating-rate notes and the second lien facilities,
have been trading at significant discounts to par value in the past few
months. Moody's notes that any negative implications on the
debt-holder's recovery prospects from potential debt-restructuring
measures involving a discounted offer on debt components of eircom's
capital structure could be considered a distressed exchange and,
by implication, a default under Moody's methodologies.
The negative outlook on the ratings mainly reflects the lack of clarity
with regard to eircom's long-term capital structure plans
and Moody's expectation that, in the short term, the
company will operate with reduced headroom under financial covenants.
Further downward pressure on the rating could occur as a result of:
(i) an absence of a detailed plan to reset covenants or bring additional
equity; and/or (ii) indications that eircom might consider a discounted
offer on the debt components of its capital structure.
Upward pressure on the rating is unlikely over the short term as a result
of the negative outlook. However, the rating outlook could
be stabilised if eircom proactively manages the covenant situation while
maintaining its current financial profile, with a debt/EBITDA ratio
of around 5.5x. Upward pressure could be exerted on the
rating over the medium term if the business plan is successfully executed
and an equity injection allows eircom to rebalance its capital structure
and maintain adequate headroom under financial covenants.
The last rating action on eircom was implemented on 27 May 2010,
when Moody's downgraded the CFR and PDR of ERCIF to B2 from B1.
The principal methodologies used in rating ERCIF and ERCIH were the "Global
Telecommunications Industry Rating Methodology", published
in December 2007, and "Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA", published in June 2009. Other methodologies
and factors that may have been considered in the process of rating this
issuer can also be found on Moody's website.
ERCIF (previously known as BCM Ireland Finance Ltd) and ERCIH (previously
known as BCM Ireland Holdings Ltd) are holding companies of eircom,
the principal provider of fixed-line telecommunications services
in Ireland and, following its acquisition of Meteor, the third-largest
mobile operator in the country. In the last 12 months ended 30
June 2010, eircom generated revenues of EUR1.82 billion and
adjusted EBITDA (as reported by the company) of EUR679 million.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information and confidential and proprietary Moody's Investors
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's Investors Service adopts all necessary measures so that the information
it uses in assigning a credit rating is of sufficient quality and from
reliable sources; however, Moody's Investors Service does not
and cannot in every instance independently verify, audit or validate
information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
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Please see the ratings disclosure page on our website www.moodys.com
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Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Espana, S.A.
Moody's downgrades ERC Ireland Finance (parent of eircom) to B3; negative outlook
Barbara de Braganza, 2
No Related Data.
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