Madrid, June 09, 2016 -- Moody's Investors Service has today upgraded to Baa1 from Baa2 the issuer
rating and affirmed the Prime-2 (P-2) short term ratings
of British Telecommunications Plc (BT) and British Telecom Finance B.V.
Concurrently, Moody's upgraded to Baa1 from Baa2 BT's
senior unsecured debt ratings and upgraded to (P)Baa1 from (P)Baa2 the
company's MTN programme rating and senior unsecured shelf rating.
Moody's has also upgraded to Baa1 from Baa2 the issuer rating of
EE Limited (EE) and senior unsecured debt ratings of EE Finance Plc,
wholly owned subsidiaries of BT. The rating agency also upgraded
EE Finance Plc's MTN programme rating to (P)Baa1 from (P)Baa2.
The outlook on all ratings is stable.
"Upgrading both BT and EE's ratings reflect the strengthened
business risk profile of the group following the integration of the fixed
and mobile activities. We also expect the company to continue to
reduce debt and improve its credit metrics, driven by sustained
revenue, EBITDA and free cash flow growth," says Iván
Palacios, Moody's lead analyst for BT. "These
strengths put BT in a better position to mitigate the potential headwinds
from increasing competition in the UK market, tougher regulation,
and content cost inflation" adds Mr Palacios.
RATINGS RATIONALE
RATIONALE FOR BT's Baa1 RATING
Today's action primarily reflects Moody's view of BT's stronger business
risk profile after the acquisition and integration of EE. The group
now benefits from increased size and scale, and exposure to both
fixed and mobile businesses, which will allow BT to offer attractive
bundles of fixed voice, broadband, mobile and television services.
As a result, BT will gain a competitive advantage over mobile-only
players, benefitting from cross-selling and bundling opportunities
that will arise across an enlarged customer base.
The rating upgrade also reflects the expectation of continued strong operating
performance, driven by revenue growth and improving EBITDA.
Moody's expects BT to monetise its investments in high speed fixed
and mobile networks as well as in exclusive content, so that it
offsets some of the impact of increased regulatory headwinds on the top
line. EBITDA growth will be further supported by BT's continued
ability to cut costs and from the synergies derived from integration of
EE. BT's management has a strong track record of delivering
against budgets and market guidance, and therefore the expectation
of achieving growth in revenues and EBITDA is relatively high.
Moody's believes that BT's strong operating performance will
be sustained despite the backdrop of a more challenging operating environment.
The UK market is likely to see consolidation, as players search
for convergence offerings, which may lead to disruptive competitive
responses, with weaker operators potentially lowering prices to
avoid market share losses. BT is the only integrated operator in
the UK market, which makes it more resilient to the threat of increasing
competition as fixed-line centric players enter in the mobile business
through MVNOs.
Tougher regulation on fiber and on BT's relationship with Openreach
remains a risk. However, based on Ofcom's preliminary
views, which enhance the current functional separation model,
leaving Openreach within BT Group, Moody's believes that the
risk of structural separation is limited.
Moody's also notes the challenge of potential inflation in content
costs, given that securing the exclusive sports rights that it already
has, is now more strategic for BT than in the past. However,
Moody's considers the disciplined approach that BT has followed
so far in its bidding strategies beneficial.
The rating upgrade also reflects the expected improvement in credit metrics
driven by EBITDA growth and continued debt reduction through cash flow
generation. Moody's expects BT's gross adjusted debt/EBITDA
ratio to stay at around 2.8x in FY March 2017 and its retained
cash flow (RCF)/net debt ratio to be in the 22%-24%
range. While credit metrics are sensitive to the large and volatile
pension deficit (which stood at GBP6.4 billion as of March 2016),
BT's strong cash flow generation will allow it to continue supporting
the pension plan.
RATIONALE FOR EE's Baa1 RATING
The upgrade reflects that EE is now part of BT and therefore part of a
stronger and fully integrated fixed and mobile telecoms group in the UK.
On a standalone basis, EE's rating was already equivalent
to that of BT prior to this deal in consideration of its solid and stable
operating performance, and moderate leverage.
The upgrade of EE in conjunction with the upgrade of BT also reflects
the benefits to EE Finance Plc's bondholders from an intragroup
guarantee from BT. The guarantee is unconditional and irrevocable.
However, there is a fall away provision in the event that EE ceases
to be a wholly owned subsidiary of BT. Due to this fall away provision,
the ratings of the two companies may not move in lockstep in the future.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects our expectation that BT will continue to successfully
execute its business plan, remain disciplined in the acquisition
of content costs, focus on reducing leverage and support its pension
plan.
WHAT COULD CHANGE THE RATING UP/DOWN
Upward rating pressure could develop over the medium term if the execution
on the company's business plan is better than initially expected
following EE's acquisition. The rating would come under positive
pressure if the company were to achieve sustainable improvements in its
debt protection ratios, such as adjusted retained cash flow (RCF)/net
debt of at least 30% and adjusted total debt/EBITDA comfortably
below 2.2x on a sustained basis, coupled with strong free
cash flow generation.
Downward pressure on the rating could arise if the company fails to successfully
execute its business plan; or the pension deficit increases substantially
from current levels or content costs inflation significantly increases,
constraining financial performance and leading to weaker credit metrics.
Credit metrics that would support a rating downgrade include adjusted
RCF/net debt sustainably falling below 22% and adjusted total debt/EBITDA
exceeding 2.8x on a sustained basis.
The principal methodology used in these ratings was Global Telecommunications
Industry published in December 2010. Please see the Ratings Methodologies
page on www.moodys.com for a copy of this methodology.
BT Group Plc, which operates principally through its 100%-owned
subsidiary British Telecommunications Plc, is the leading provider
of local, long-distance and international telecommunications
services in the UK and one of the world's leading providers of communication
solutions and services, operating in more than 170 countries.
Following the completion of its GBP12.5 billion acquisition of
EE Limited in January 2016, BT is also one of the largest mobile
network operators in the UK.
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.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead analyst and the Moody's legal entity that has issued the ratings.
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.
Ivan Palacios
Associate Managing Director
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
SUBSCRIBERS: 44 20 7772 5454
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454
Moody's upgrades BT and EE's ratings to Baa1 from Baa2; stable outlook
