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Rating Action:

Moody's upgrades Colt to Ba2 from Ba3; stable outlook

27 Aug 2015

Madrid, August 27, 2015 -- Moody's Investors Service has today upgraded alternative telecom provider Colt Group S.A.'s (Colt) Corporate Family Rating (CFR) to Ba2 from Ba3. Concurrently, Moody's has upgraded the company's Probability of Default Rating (PDR) to Ba2-PD from Ba3-PD. The outlook on all ratings is stable.

Today's rating action concludes the review for upgrade that Moody's initiated on 16 June 2015, following the publication of the updated methodology "Financial Statement Adjustment in the Analysis of Non-Financial Corporations".

"Our decision to upgrade Colt mainly reflects the positive impact on the company of revisions to our methodology for capitalising operating leases. The revisions have reduced Colt's adjusted debt and improved its financial ratios, boosting the company's overall credit profile," says Iván Palacios, a Moody's Vice President - Senior Credit Officer and lead analyst for Colt.

RATINGS RATIONALE

The upgrade of Colt to Ba2 from Ba3 primarily reflects the material improvement in the company's credit metrics following the change in Moody's methodology for capitalising operating leases. Since Colt does not have any funded debt on its balance sheet, all of its adjusted leverage is related to capitalised operating leases. As a result, the updated methodology has resulted in a reduction in Moody's adjusted leverage ratio to 1.4x as of December 2014, compared with 2.2x prior to this methodology change.

While these leverage levels are lower than the average levels among similarly rated telecom companies, Moody's believes that there is potential for higher leverage as the company pursues its growth initiatives. Therefore, the rating incorporates some headroom for increased leverage, as long as debt/EBITDA (as adjusted by Moody's) remains below 2.5x.

The rating upgrade also factors in the company's new business plan, announced on 30 June 2015, which will enable Colt to accelerate performance improvement and cash flow generation by focusing on its core infrastructure and asset based businesses (Network, Voice and Data Centre Services), while exiting its IT Services business over the next two to three years. As a result of this restructuring, Colt expects to incur exceptional cash costs of around EUR80 million, and anticipates around EUR25 million of annual savings from 2016 onwards.

In Moody's view, the new business plan will centre the company's focus on its more profitable activities, enabling it to generate stronger cash flows by reducing costs and capex. However, this plan incorporates a degree of execution risk, with growth prospects likely to be more limited than under previous plans.

The rating action also takes into account the expectation that Fidelity will achieve full ownership of Colt, following Fidelity's offer to acquire the shares that it did not already own (around 34% stake) in a transaction that will not involve incremental debt at the Colt level. Fidelity is a financially strong shareholder, but absent clear and effective guarantees from the parent, Moody's will continue to assess Colt's credit profile on a standalone basis with no uplift owing to parent support. Moody's considers the transaction as credit neutral because the controlling shareholder will remain unchanged and, as a result, the rating agency does not expect any significant change in Colt's strategies. Fidelity's future plans for Colt remain unclear at this point; however it has managed the company for the past few years with a conservative balance sheet, while financial covenants in its loan documentation limit Colt's capacity to incur significant leverage.

Colt is expected to delist from the London Stock Exchange in September. The consequences of delisting would include, among other factors, that quarterly reports will not be required and, subject to certain conditions, Colt may no longer have to produce consolidated financial statements. When this happens, Moody's will assess whether Colt can provide sufficient, regular and reliable financial information for the rating agency to monitor and maintain the rating.

Colt's Ba2 rating reflects (1) the highly fragmented competitive landscape for business telecoms in Europe; (2) the company's limited organic growth prospects; (3) its weak free cash flow generation; and (4) the potential for higher leverage over time as the company pursues its growth initiatives.

However, the rating also factors in (1) the company's fully owned and managed, pan-European network infrastructure, which gives it a competitive advantage over other alternative carriers that can be more dependent on other operators' networks; (2) potential profitability and cash flow generation improvements as the company focuses on reducing costs, exiting unprofitable businesses and integrating recent acquisitions; (3) Colt's very solid credit metrics, with no financial debt in its capital structure; (4) its good liquidity profile; and (5) the credit strength of its main shareholder, Fidelity.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects our expectation that Colt's operating performance and cash flow generation will improve with the implementation of the new business plan. Also, we expect that Colt's credit metrics will remain within the guidance for the Ba2 rating even if the company moderately increases leverage to fund its growth initiatives.

WHAT COULD CHANGE THE RATING UP/DOWN

Positive ratings pressure is unlikely unless Fidelity's future plans for Colt and its financial policies become more visible. Over the long-term, upward pressure on the rating could develop if Colt (1) achieves and maintains positive overall organic revenue growth and generates meaningful growth in EBITDA and free cash flow, such that its free cash flow/Debt ratio (as adjusted by Moody's) remains consistently in the low-double digits; and (2) exhibits a commitment to maintain its debt/EBITDA ratio (as adjusted by Moody's) consistently below 1.5x.

Conversely, downward ratings pressure could develop if (1) Colt's revenue growth, EBITDA growth and free cash flow generation turns materially negative on a sustained basis; or (2) the company's Debt/EBITDA (as adjusted by Moody's) raises sustainably above 2.5x following a debt-financed acquisition or shareholder remuneration initiatives.

PRINCIPAL METHODOLOGY

The principal methodology used in these rating was Global Telecommunications Industry published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Colt Group S.A. is one of the leading alternative telecom providers in Europe. In 2014, the company generated revenues of EUR1.5 billion and EBITDA of EUR297 million.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Ivan Palacios
VP - Senior Credit Officer
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 Colt to Ba2 from Ba3; stable outlook
No Related Data.
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