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Rating Action:

Moody's downgrades TDC's Baa3 senior unsecured debt ratings to B1 and assigns B1 corporate family rating to its holding company, DKT Holdings ApS; outlook stable

08 May 2018

Madrid, May 08, 2018 -- Moody's Investors Service, ("Moody's") has today downgraded the senior unsecured ratings of Danish telecom operator TDC A/S ("TDC" or "the company") to B1 from Baa3, and assigned a new B1 corporate family rating ("CFR") and B1-PD probability of default rating ("PDR") to its majority shareholder, DKT Holdings ApS ("DKT or "the Consortium"). Simultaneously, Moody's has withdrawn the Baa3 long-term issuer rating of TDC. The outlook on the ratings is stable.

The ratings on the existing EMTNs due 2027 and the Junior Subordinate EMTNs due 3015 remains unchanged, as the ratings on these instruments will be withdrawn upon establishment of the permanent capital structure.

On May 4th 2018, the Consortium financed the €4.9 billion acquisition of 91% of the share capital of TDC with €2.4 billion of equity and €2.5 billion of acquisition debt. Moody's expects the Consortium to execute its rights to squeeze-out the remaining 9% of TDC's share capital by June 2018. Once the squeeze-out is settled, the Consortium has announced that it will establish a permanent capital structure including c. €1.0 billion of existing unsecured notes or €1.0 billion of backstop facility at the level of TDC A/S, €1.4 billion of high yield bonds at the level of an intermediate holding company named DKT Finance ApS, undrawn bank facilities (RCF & Capex) amounting to €600 million and €2.7 billion of equity (100% ownership of TDC).

This action concludes the review for downgrade initiated on 13 February 2018, following the announcement by TDC that it had received a takeover offer from DK Telekommunikation ApS, a company controlled by a consortium of Danish pension funds (PFA, PKA, ATP) and Macquarie Infrastructure and Real Assets.

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

RATINGS RATIONALE

The B1 CFR assigned to DKT Holdings ApS reflects the combination of the group's strong business profile and expectation of improved operating performance, offset by the impact on the group's credit metrics from the substantial debt incurred to finance the buyout. Moody's expects that the group will continue to be managed with a somewhat aggressive financial profile under its current ownership structure with limited expected deleveraging.

The group will be highly leveraged as a result of the debt incurred to finance the buyout. On a pro-forma basis, Moody's adjusted debt/EBITDA in 2017 will be approximately 6.1x on a consolidated level, compared to 3.5x pre-transaction. The above excludes the impact of approximately €2.0 billion shareholder loans to DKT, which receive equity treatment as per Moody's Hybrid Equity Credit methodology.

The B1 CFR also reflects the strength of the company's market position in Denmark, as demonstrated by a 63% market share in landline telephony (retail and wholesale), 51% in broadband, 55% in TV (combining CATV, PayTV and internet protocol TV) and 41% in mobile voice services. Competition in the Danish mobile market remains intense but TDC has sustained price increases while maintaining relatively stable churn levels and defending its market share. Moody's believes its stable market share reflects TDC's strategy to focus on quality of service, superior product offering and quality of mobile network in Denmark and this is not expected to change under the new ownership. TDC has strong fixed and mobile network platforms owing to high capex levels in recent years and is the owner of the majority of the critical telecom infrastructure in Denmark, including cable assets, a differentiating factor compared to other European telecom peers.

The B1 CFR also takes into consideration the expectation that the company's EBITDA will stabilize in 2018, building on the recovery of its organic EBITDA in 2017. Moody's expects revenue declines to persist in 2018, but growth to reach near stabilization in 2019. This will be supported by the continued recovery in consumer mobile ARPU trends amid growth in demand for data and market repair, and a gradual recovery in its small and medium-sized business segment in Denmark, under pressure for a number of years due to intense competition. Moody's expects further upside to be provided by the cost-saving initiatives implemented by management, designed to maintain margins at or above 40%.

The rating agency also expects that cash conversion, defined as (EBITDA-capex)/EBITDA, will improve, supported by lower investments following historically high capex in recent years. However, despite improved cash conversion, free cash flow will be constrained by high cash interest and dividends paid to its new shareholder DKT. In the next 12-18 months, Moody's expects FCF/debt (Moody's adjusted) of approximately 1%, compared to approximately 6% pre-transaction. As a result of low free cash flow generation, any deleveraging is likely to be driven primarily by EBITDA growth supported by opex savings.

The B1 rating assigned to TDC's existing senior unsecured bonds reflects the fact that the bonds are at the level of TDC, which is the OpCo, and are structurally senior to over €1.4 billion of debt at the Bidco level. The revised rating, however, recognizes that TDC's unsecured debt is, nevertheless, effectively subordinated to the planned new €3.9 billion TLB.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that TDC's operating performance will gradually improve through a combination of an improving pricing environment in mobile, more focused and agile marketing strategy, efficiency gains and capex optimisation. The outlook also reflects Moody's expectation that DKT will execute its strategy, which will enable the company to stabilise its operating performance in 2018 and deliver growth from 2019 onwards. It also recognises Moody's expectation that the group is likely to continue be managed towards a leveraged financial profile over time.

WHAT COULD CHANGE THE RATING UP/DOWN

The ratings could be upgraded as a result of improvements in the company's credit metrics, such as adjusted debt/ EBITDA improving to below 5.0x on a sustainable basis, and adjusted retained cash flow/gross debt improving sustainably to a level in the mid-teens, in an improved business environment.

The ratings could be lowered if: (1) the company was to deviate from the execution of its new strategy; (2) the company was to embark on an aggressive expansion/acquisition programme, most likely outside its existing footprint, leading to higher financial, business and execution risk; or (3) its credit metrics were to deteriorate, including adjusted retained cash flow/gross debt falling to below 8% or adjusted gross debt/EBITDA trending towards 6.0x on an ongoing basis.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

DKT Holdings ApS is a holding company of TDC A/S, the principal provider of fixed-line, mobile, broadband data and cable television offerings in Denmark. The company also provides telecom services, including TV, mobile and broadband, to customers in Norway. In 2017, the company generated revenue and EBITDA of DKK20.3 billion and DKK8.2 billion, respectively.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: TDC A/S

....Senior Unsecured Regular Bond/Debenture with maturity March 2, 2022, Downgraded to B1 from Baa3

....Senior Unsecured Regular Bond/Debenture with maturity February 23, 2023, Downgraded to B1 from Baa3

....Senior Unsecured Medium Term Note Program, Downgraded to (P)B1 from (P)Baa3

Assignments:

..Issuer: DKT Holdings ApS

.... Corporate Family Rating, Assigned B1

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

Withdrawals:

..Issuer: TDC A/S

.... LT Issuer Rating, Withdrawn , previously rated Baa3

Outlook Actions:

..Issuer: DKT Holdings ApS

....Outlook, Assigned Stable

..Issuer: TDC A/S

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

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.

Carlos Winzer
Senior Vice President
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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