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Rating Action:

Moody's upgrades Vivacom's CFR to Ba3 from B1; outlook stable

28 Mar 2018

London, 28 March 2018 -- Moody's Investors Service ("Moody's") has today upgraded Bulgarian Telecommunications Company EAD's (Vivacom) Corporate Family Rating (CFR) to Ba3 from B1 and has affirmed its Probability of Default Rating (PDR) of B1-PD.

The outlook on the ratings is stable.

"The upgrade of Vivacom's ratings reflects the company's successful completion of a refinancing package which will be used to repay in full by April 2018 the company's outstanding €400 million notes due November 2018. It also reflects the company's consistent track record of steady deleveraging since 2013, our expectation of a continued improvement in key credit metrics, and the company's conservative financial policies," says Alejandro Núñez, a Moody's Vice President -- Senior Analyst and lead analyst for Vivacom. As part of the recent refinancing exercise, Moody's expects the company will primarily use its on-balance sheet cash to repay the balance of the outstanding notes' redemption not funded by its new bank credit facility, reducing its outstanding gross debt by approximately BGN113 million, from BGN788 million to BGN675 million on a proforma basis.

The B1 rating on the existing €400 million 6 5/8% senior secured notes due November 2018 were unaffected by this rating action and remain unchanged, as they will shortly be redeemed with proceeds from the new bank facility. Moody's expects to withdraw the ratings on those existing notes once they are repaid.

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

RATINGS RATIONALE

-- RATIONALE FOR Ba3 CFR

Vivacom's Ba3 CFR reflects: (1) the company's position as a leading telecom operator in Bulgaria with strong market shares in fixed-line telephony and fixed-line broadband; (2) Vivacom's strong track record of growing its mobile segment's market share and revenues; (3) the company's modest leverage with Moody's-adjusted Gross Debt / EBITDA expected to be around 2.4x at year-end 2018; (4) its diversified business model, with offers in fixed-line voice, broadband internet, mobile and pay-TV; (5) expectations of materially improved free cash flow generation in 2018-2020 supported by modest EBITDA growth, reduced working capital outflows, lower capex spending and significantly lower interest expenses resulting from the recent refinancing exercise; and (6) good liquidity following the successful completion in Q1 2018 of a 5-year senior credit facilities package.

The rating also reflects: (1) the company's modest scale compared with global telecommunications peers due to its limited geographical focus in Bulgaria; (2) the competitive telecom market landscape in Bulgaria and its resulting low, albeit rising, Average Revenues Per User (ARPU); (3) revenue pressure in fixed-line services as a result of the structural decline in fixed-line voice services and price pressures in the corporate/small enterprises segment; (4) the potential for a change in the company's parent's (Viva Telecom (Luxembourg) S.A. [Viva Telecom]) shareholding structure, which is subject to existing litigation cases at the level of holding companies outside the Vivacom restricted group; and (5) the possibility that a material portion of Vivacom's operating cash flows would be upstreamed over the next two years to the company's parent (Viva Telecom), which is a risk mitigated by the strong covenant package and restricted payments limitations in Vivacom's debt documentation.

Although Moody's expects the company to post low single-digit percentage revenue and EBITDA growth over the next two years, it also expects Vivacom's capex spend will decline from 2018 on both an absolute basis and relative to revenues, such that capex/revenues will be around 20% in the 2018-2020 period, following three years of elevated investments in Vivacom's national 4G network. In addition, the company's recent refinancing will roughly halve its financial debt costs from mid-2018 onward thereby saving the company approximately BGN33 million in annual interest expenses after its outstanding €400 million notes are repaid in April 2018.

Following materially stronger free cash flow generation in 2017 (of BGN143 million), Moody's anticipates that Vivacom will continue to generate solid operating and free cash flow, relative to 2014-2016 levels, while maintaining an adequate level of network and spectrum investment to support its future growth and competitiveness.

Vivacom has also proven its adherence to a conservative financial policy over the past two years and in 2017 reduced its financial leverage target to a range of 2.0-2.5x net debt/EBITDA (company-reported) from 3.0x previously. Moody's notes that Vivacom's reported net leverage was under 2.0x at year-end 2017 and expects the company's reported net leverage to remain below 2.0x over the 2018-2020 period.

-- RATIONALE FOR B1-PD PDR

Moody's has affirmed the PDR of B1-PD to reflect the change in Vivacom's debt structure to an all-bank loan structure following the repayment of the existing senior secured notes with proceeds from the new bank facility. The company's B1-PD PDR expresses Moody's view of a 65% family recovery rate, instead of the standard 50% that the rating agency uses for capital structures that comprise both bank loans and bonds, and reflects the inclusion of meaningful maintenance covenants in those credit facilities' documentation as well as the bank facility's security over the company's tangible assets. The 65% family recovery rate translates into a PDR which is one notch below the Ba3 CFR.

RATIONALE FOR STABLE OUTLOOK

Vivacom is well positioned in the Ba3 rating category. The stable outlook reflects an expectation that Vivacom's gross leverage will continue to decline modestly, to an average of 2.4x over 2018-2019, and that the company will continue to generate positive free cash flow even after accounting for a moderate dividends upstream to service a term loan at Viva Telecom. Also embedded in the outlook is an expectation that the company will not increase its conservative net leverage target of 2.0x-2.5x Net debt/EBITDA (company-reported) and will maintain a good level of liquidity.

While Vivacom's credit metrics are currently at the stronger end of the Ba3 category, the stable outlook reflects a degree of uncertainty regarding the company's long-term ownership and shareholder strategy.

WHAT COULD CHANGE THE RATING UP / DOWN

Upward pressure on the rating could develop if the company's (Moody's-adjusted) gross leverage remains consistently below 2.5x while it also sustainably maintains (Moody's-adjusted.) Retained Cash Flow (RCF) / Gross Debt above 30%.

Downward pressure on the ratings could arise should Vivacom's operating performance weaken or should the company incur additional indebtedness, such that its (Moody's-adjusted) gross leverage were to be sustainably above 3.0x. Negative ratings pressure would also arise should the company's (Moody's-adjusted.) Retained Cash Flow (RCF) / Gross Debt remain sustainably below 20% or if there were a material deterioration in the company's liquidity profile.

LIST OF AFFECTED RATINGS

Upgrades:

..Issuer: Bulgarian Telecommunications Company EAD

....LT Corporate Family Rating, Upgraded to Ba3 from B1

Affirmations:

..Issuer: Bulgarian Telecommunications Company EAD

....Probability of Default Rating, Affirmed at B1-PD

Outlook Actions:

..Issuer: Bulgarian Telecommunications Company EAD

....Outlook, Changed to Stable from Positive

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.

Bulgarian Telecommunications Company EAD ("Vivacom") is the national telecom incumbent and leading integrated operator in Bulgaria (Baa2 stable), providing mobile, fixed-line telephony, fixed-line broadband and pay-TV (both DTH and IPTV) services nationwide. Vivacom is a fully integrated operator that offers quadruple-play services nationwide in Bulgaria and benefits from its leading position in fixed-line telephony business with an 80% revenue share and the largest player in fixed-line broadband with a 26% subscriber market share (as of December 2017). In addition, Vivacom is Bulgaria's third-largest mobile operator (29% revenue market share as of December 2017), providing post-paid services to both residential and business customers and pre-paid services to residential customers with a total of 3.1 million subscribers. As of December 2017, Vivacom's revenue mix was 59% mobile, 14% fixed voice, 10% fixed data, 8% pay-TV and 9% other telecommunications services. In 2017, the company generated total revenue of BGN889.5 million (€454.8 million, at a Bulgarian lev pegged to the Euro at BGN1.95583/€) and company-adjusted EBITDA of BGN318.9 million (€163.1 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 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.

Alejandro Nunez
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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 Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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