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Rating Action:

Moody's downgrades Tele Columbus' rating to B3; outlook changed to stable

17 Dec 2019

Madrid, December 17, 2019 -- Moody's Investors Service ("Moody's") has today downgraded Tele Columbus AG's (Tele Columbus) corporate family rating (CFR) to B3 from B2, probability of default rating (PDR) to B3-PD from B2-PD, and the instrument rating on the senior secured bank credit facilities and senior secured notes to B3 from B2. At the same time, Moody's has changed the outlook to stable from negative on all ratings.

"The ratings downgrade reflects Moody's expectations that the company's gross debt/EBITDA (as adjusted by Moody's) will remain at elevated levels of around 6.5x for the next 12-18 months with limited positive free cash flow generation while the company will have to address the approaching expiry of its revolving credit facility (RCF) in January 2021 ", says Agustin Alberti, a Moody's Vice President -- Senior Analyst and lead analyst for Tele Columbus.

"On the other hand, the change in outlook to stable from negative takes into account the good progress of the turnaround plan of the company, resulting in the improvement of its operational performance and the stabilization of its main financial metrics and Moody's expectation that the company will continue its path of recovery," adds Mr. Alberti.

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

RATINGS RATIONALE

Although the integration of the acquisitions of PrimaCom AG and Pepcom is now complete and, despite the stabilization of its key operating and financial metrics in 2019, Moody's expects Tele Columbus' leverage will remain high with Moody's gross debt/EBITDA projected at around 6.5x in 2019 and 2020 and gradually reducing towards 6.3x in 2021, outside the leverage triggers the rating agency considers as commensurate for a B2 rating. In addition, the rating agency considers that the company will need to focus on its liquidity management, as the existing RCF matures in January 2021, with less than 13 months to refinance it while free cash flow is projected to turn only moderately positive in 2020.

The change of outlook to stable reflects the fact that the company is doing good progress in its turnaround plan after the challenges associated with PrimaCom's AG and Pepcom's integration, which led to a significant operational underperformance, increase in leverage and liquidity deterioration in 2018. The new management has been focusing in finalizing the integration project and improving key operational areas for the company. The measures implemented as part of the turnaround plan include among others (i) the full consolidation of the customers and accounting systems into unified platforms, (ii) the harmonization of the recognition policies for homes connected and RGUs to provide more clarity and transparency, (iii) the successful transition of analogue TV to digital, (iv) the improvement of the customer service, (v) the revamp and simplification of the tariff portfolio, (vi) the reduction of legal entities generating tax savings and (vii) the continued investment in the network upgrade.

As a result of all these measures, the company has been able to improve its main key operating metrics reducing churn, improving customer satisfaction and starting to grow customers in the broadband and telephony segments. In the first nine months of 2019, revenues increased by 0.5% (-0.7% excluding construction related projects), normalized EBITDA was flat and restructuring costs decreased to EUR21 million, down EUR13 million year-on year. At its third quarter results, the company confirmed its 2019 guidance for broadly stable revenues, normalized EBITDA, and capex.

Moody's expects revenues (excluding low margin construction revenues) to be broadly stable in 2020, as positive internet customer ads, new B2B wins and additional wholesale revenues will compensate the decline in basic TV customer base and related revenues. Moody's expects the company to generate moderately positive free cash flow in 2020 on the back of lower restructuring costs, further savings from efficiency measures, and lower capital spending.

In addition, Moody's considers that there is potential upside to revenue and earnings through potential network wholesale access deals, like the one signed with Telefonica Deutschland in October 2019. This deal will generate high margin revenues over the medium term (expected to contribute meaningfully to revenues and EBITDA from 2021) with low cannibalization risk as Tele Columbus currently just has a 20% penetration of the network with its own retail base.

Moody's considers Tele Columbus' liquidity position to be adequate for its near-term operational needs. As of 30 September 2019, the company had cash and cash equivalents of EUR9.0 million and access to a EUR50 million RCF due in January 2021, of which EUR8.0 million was drawn. In the first nine months of 2019, the company reported total negative FCF (including M&A and one-off related payments) of EUR25 million. In the third quarter of 2019, the company reported underlying break even FCF and Moody's expects FCF to remain again around flat in the fourth quarter. The company's RCF is restricted by a maintenance financial covenant set at 6.5x (net debt/normalised EBITDA, tested when the RCF is 35% drawn on a quarterly basis), under which headroom will tighten to around 5% as of year-end 2019. Besides the RCF due in January 2021, which Moody's expects to be refinanced in the coming months, the company does not face any debt maturities before 2023 when its EUR75 million term loan (secured in October 2018 for liquidity purposes) falls due.

While management is confident that it should generate sufficient cash flows going forward to cover its business requirements, Moody's notes that the company can take additional measures such as temporarily reducing its discretionary capex if liquidity comes under pressure.

Governance considerations, which Moody's take into account in assessing Tele Columbus' credit quality, relate primarily to the efforts taken by the management to establish uniformed monitoring tools to better manage the performance of the business. The agency also notes that potential conflicts of interest may arise in the future with its largest shareholder, United Internet holding a 29.7% equity stake, which controls the Board and holds relevant interests in the telecom sector through its 75.1% equity stake in Drillisch.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that the company (1) will maintain its path towards improving its operations, translating in modest revenue and EBITDA growth, (2) will be able to gradually delever on the back of EBITDA growth together with positive FCF generation, and (3) will manage its liquidity in a prudent manner.

WHAT COULD CHANGE THE RATINGS DOWN/ UP

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; FCF remains meaningfully negative; (2) a timely execution of the turnaround plan is unsuccessful, such that the business fails to return to growth; or (3) the liquidity position deteriorates.

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).

LIST OF AFFECTED RATINGS

..Issuer: Tele Columbus AG

Downgrades:

....Probability of Default Rating, Downgraded to B3-PD from B2-PD

....Corporate Family Rating, Downgraded to B3 from B2

....Senior Secured Bank Credit Facilities, Downgraded to B3 from B2

....Senior Secured Regular Bond/Debenture, Downgraded to B3 from B2

Outlook Action:

....Outlook, Changed To Stable From Negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Pay TV published in December 2018. 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 where it is the second largest cable operator. The company is based in Berlin (Germany) and reported revenue of EUR494 million and normalised EBITDA of EUR236 million in 2018.

REGULATORY DISCLOSURES

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.

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.

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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