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Rating Action:

Moody's reviews Bité for possible downgrade

04 Nov 2008
Moody's reviews Bité for possible downgrade

London, 04 November 2008 -- Moody's Investors Service today placed the ratings of Bité Finance International B.V on review for downgrade. Ratings impacted are the B3 corporate family rating; the B3 probability of default rating; the B2 rating on EUR 190 million senior secured floating rate notes due 2014; and the Caa2 rating on the EUR 110 million senior subordinated floating rate notes due 2017.

The review for downgrade was initiated by Moody's increasing concerns over: (a) Bité's high level of indebtedness combined with challenging conditions in both the Lithuanian and Latvian markets; (b) its deteriorating liquidity profile as the group continues to draw on the EUR 30 million bank facility due 2014 to help finance the expansion in Latvia; and (c) the risk of failing to meet financial covenants in that facility, as they tighten on a quarterly basis.

Although Bité's Lithuanian business - which has 82% of group assets and provides 91% of total group revenue - remains profitable, the market is highly competitive and is also slowing. Bité reported 5% growth in Lithuanian service revenue for the nine months to 30 September 2008, but Ebitda was essentially flat. Compared to the same period in 2007, the core postpaid segment -- which generated 65% of Lithuanian service revenue - is showing slightly lower ARPU, 15% higher customer acquisition costs and 37% greater churn.

The expansion of Bité's business into Latvia, where it is a new entrant, remains challenging. Although Latvian service revenue for the nine months to 30 September 2008 grew by 57%, Ebitda became even more negative over the same period and is below expectations at the time of the LBO in February 2007. On the positive side, the company has managed to reduce the cost of its network expansion so that Ebitda minus capex is broadly per expectations.

Bité's management is publicly committed to the Latvian expansion strategy, including material capital expenditures over the medium term to continue build-out of the network. Given weaknesses in the core Lithuanian market that underpins the business and the need to service the company's very high debt burden following the LBO, this strategy could lead to ongoing negative group free cash flow. Although Bité expects to see further Ebitda growth in 2009, actual results may be negatively impacted by the generally deteriorating economic environment.

Bité has utilized its bank facility to help fund the expansion, and this was drawn at EUR 18 million on 30 September 2008. Given the negative free cash flow and the lack of material liquid alternate assets, the company will continue to draw on the facility and its liquidity profile will remain weak despite the absence of any near-term debt maturities. Without additional funding the company may have to re-think its strategy, in particular relating to expansion in Latvia. It may be possible for Bité to suspend the capex programme at relatively short notice to address a funding shortfall, although this is not currently envisaged and would then raise broader questions about the group's new strategy.

A further problem relates to the company's ongoing requirement to meet its bank leverage (Debt/Ebitda) covenants. The covenant tightens on a quarterly basis, reflecting the LBO business plan assumptions of higher Latvian Ebitda (and possibly an IPO refinancing, which now appears unlikely given financial market conditions). Given the deteriorating economic environment and the company's current Ebitda and debt profile, there is now greater probability that Bité could breach the covenant at some point. The reaction of the banks to this event, and their willingness to call an event of default, may be influenced by the fact they have first ranking access over security.

Bité's reported leverage at 30 September 2008 was 9.2x, with Moody's adjusted leverage of 10.7x. Leverage has remained very high as the company has used debt to expand the Latvian network, and as these Latvian operations have remained Ebitda negative. The company has initiated cost reduction measures but prospects for near-term debt reduction -- an important assumption behind the current B3 corporate family rating -- may now be deferred.

The retained earnings deficit was reported at about EUR 90 million at the same date, with reported shareholder equity of EUR 96 million (down from EUR 136 million at 31 December 2007). However, changes in the economic and financial environment mean that the company's enterprise value is likely to have deteriorated significantly since the LBO, with fewer potential acquirers of the business or parts of it. It is unclear how much equity value the shareholders believe remains in the business given the very high leverage. In Moody's view, that determination -- together with a view to the benefits of completing the capex programme in Latvia - is critical to understanding whether Bité's shareholders might support the company and/or its current business plan with additional funding.

Moody's has not considered the recent change in the CEO of the group as a factor in initiating the review for downgrade, as it understands this change is unrelated to business issues.

Moody's review will focus on: (a) Bité's strategy and business plan for 2009 and beyond, with a specific focus on the Latvian market; (b) the company's revised credit metrics, with a focus on expected timing of reduction in leverage; (b) the company's liquidity profile, including the prospects for a breach of bank financial covenants; (c) the prospects for additional equity funding to support the company's business plan and/or to avoid any possible default.

The rating will be downgraded if there appears to be a material possibility of a covenant breach over the medium term, or if there does not appear to be a reasonable prospect of material near-term improvement in the company's liquidity and/or financial profile. A rating downgrade of at least one notch is currently the most likely outcome of the review.

Bité Finance International B.V. is the Dutch holding company of the Lithuanian company Bité Lietuva UAB. Bité is a mobile telecommunications operator in Lithuania and Latvia, which for the nine months to 30 September 2008 reported revenues of about EUR 161 million. In February 2007 a private equity consortium led by Mid Europa Partners acquired Bité through a leveraged buyout for a total consideration of EUR 443 million.

London
Chetan Modi
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
David G. Staples
Managing Director
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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