Fitch Ratings has affirmed Poland’s Telekomunikacja Polska’s (TP) Long-term Issuer Default Rating (IDR) at ‘BBB+’ with a Stable Outlook, and Short-term IDR at ‘F2’. Fitch has also affirmed the euro-denominated bonds issued by TP’s finance subsidiary, TPSA Eurofinance France, at ‘BBB+’.
The ratings continue to reflect TP’s solid positions in the Polish telecom market despite ongoing intense competitive pressures, particularly from cable TV operators in the fixed segment. The ratings also take into account the resilience of TP’s financial profile in the face of challenging operational conditions, with pre-dividend free cash flow margin of 15.6% in FY10, a relatively high level compared to European telecom peers.
At the same time, the ratings factor in the risk that cash flows generation over 2011-2012 could weaken materially due to the combined ongoing broadband investment programme, the cost of acquiring fourth-generation mobile spectrum and finally, although Fitch acknowledges that these legal cases are still ongoing, the new penalty imposed by the EU in June for the abuse of TP’s dominant position in the wholesale broadband access market and the settlement of the DPTG dispute.
The Stable Outlook reflects Fitch’s view that while there is little evidence so far that TP’s fixed business is being sustainably turned around, the Polish incumbent should see the benefits of its ongoing cost cutting initiatives, the mobile network sharing deal with Deutsche Telekom’s PTC and a more benign regulatory landscape. It is unclear if the re-pricing of its retail offers in 2010, the added pricing scope provided under the Memorandum of Understanding with the regulator, combined with the strengthening of its content offering via the ‘N’ satellite platform agreement will be sufficient to close the competitive gap and effectively quickly curb the negative fixed-line revenue trend.
However, any evidence that TP is falling behind these expectations, combined with amongst other things a lack of improvement in the revenue trend and broadband market position or the group’s EBITDA margin is moving towards 30% could put pressure on the ratings. Equally, any material increase in what Fitch already considers as generous shareholder returns, without a corresponding improvement in the company’s operational performance, would be considered as ratings negative.
Fitch notes that TP faces material contingency risks. While the DPTG proceedings are ongoing and the outcome is unclear at this stage, Fitch’s rating case has conservatively assumed that the full amount of the estimate DPTG risk provisioned in TP’s accounts is payable in 2011 along with the PLN508m EU fine) and partially offset by the EMITEL disposal proceeds. Under this scenario, TP is expected to remain well below its financial policy of a net debt/EBITDA ratio not exceeding 1.5x.
TP generated pre-dividend free cash flow in excess of PLN2.4bn in 2010 despite an 8.5% reduction in EBITDA. This allowed it to distribute PLN2bn of dividends while continuing to improve its net debt position to PLN3.9bn from PLN4.4bn. Net leverage ratio (unadjusted net debt/EBITDA) remained largely unchanged at 0.7x as a result of EBITDA contraction and FFO adjusted net leverage at 1.2x.
Fitch continues to rate TP independently from France Telecom, its controlling shareholder with 49.8% of voting rights. Operational support from FT has been factored into TP’s ratings.