Irish Telecom Group Eircom Rating Affirmed At 'B+' On Proposed Dividend Recapitalization; Outlook Stable

  • eircom plans to issue €850 million of debt, through subsidiaries eircom Finco and eircom Finance, to pay a €300 million dividend to shareholders and refinance the outstanding bond.
  • Although this will result in higher adjusted leverage, it will be mitigated by eircom's stronger-than-expected operating performance in 2018 stemming from ongoing cost optimization and an improving subscriber mix.
  • We are affirming our 'B+' ratings on eircom Holdings (Ireland) Ltd. and its existing senior secured debt, and assigning our 'B+' rating to the proposed senior secured instruments.
  • The stable outlook reflects the group's focus on streamlining its operations and cost structure, while investing in its networks to gain subscribers and market shares, partly offset by higher leverage after the proposed dividend recapitalization.
PARIS (S&P Global Ratings) April 23, 2019--S&P Global Ratings today made the 
rating actions listed above. 

We affirmed the ratings because we expect that the higher adjusted leverage 
resulting from the dividend recapitalization will be offset by: 
  • Better operating performance than we initially expected, on an improving subscriber mix in the fixed and mobile operations; and
  • A further improvement of profitability, since we anticipate ongoing optimization of the cost base and a gradual decline of restructuring costs.
In our revised base-case scenario, we now anticipate that eircom's adjusted 
debt to EBITDA will be between 4.5x and 5.0x in fiscal year ending June 30, 
2019, slightly improved from 5.0x as of fiscal year 2018. This is due to 
expected adjusted EBITDA growth on the planned decline of restructuring costs, 
as well as hefty cost savings, but partly offset by the proposed €300 million 
dividend recapitalization. At the same time, we anticipate free operating cash 
flow (FOCF) to debt will remain below 5% in 2019, hampered by a cash outflow 
of about €75 million from the voluntary redundancy plan. 

We also consider that recapitalizations and cash dividend payments may occur 
again in the future, although we acknowledge the group's net leverage target 
of 3.5x-4.0x. We believe this might balance the potential for organic 
deleveraging through increasing profitability and cash flows. 

In our rating analysis, we consider eircom's leading positions in the Irish 
fixed-line telephony and broadband markets, which lead to solid fixed-line 
margins, and its strong presence in converged services, supported by its 
national mobile network. We also factor in eircom's ongoing investments to 
roll out its fiber network-- passing and connecting respectively 79% and 36% 
of Irish premises as of Dec. 31, 2018--and improving its 4G nationwide 

Furthermore, network upgrades and eircom's subsequent focus on the customer 
proposition, will support an improvement in the subscriber mix. This includes 
an increasing number of fiber-based broadband subscribers and the ongoing 
migration from pre-pay to post-pay mobile offers. We expect it will continue 
to drive convergence, improve the customer churn rate and average revenues per 
user, and likely regain retail broadband market shares. In addition, eircom 
has demonstrated its ability to trim its cost base, allowing continued 
strengthening of EBITDA margins. We thus believe eircom's insourcing and 
streamlining plans will result in further profitability improvements through 
headcount cost reduction, as well as process and offer simplification.  

These strengths are partly offset by the fierce competition inherent to 
Ireland's fragmented telecom market, with four fixed-line and three mobile 
players in a relatively small market of 1.8 million households. We believe 
this environment puts constant pressure on pricing and exacerbates customer 
churn, which could limit the commercial benefits of eircom's ongoing network 
investments. The lower profitability of eircom's mobile division, owing to 
this division's smaller scale than that of competitors, further constrains the 
business risk profile. eircom has a mobile market share of about 20%, behind 
Vodafone (around 36%) and 3 Group (around 32%). 

Our outlook on eircom is stable because we expect the group's S&P Global 
Ratings-adjusted EBITDA margins will increase to more than 40% in 2019, on a 
more efficient cost structure and gradual phasing out of restructuring costs. 
We also anticipate adjusted debt to EBITDA will drop to 4.5x-5.0x from about 
5.0x in fiscal year 2018, with slightly positive FOCF. We also believe 
eircom's management and shareholders will focus on streamlining the group's 
commercial and cost structure, while investing in its networks to gain 
subscribers and market shares. However, we cannot exclude further dividend 
recapitalizations or cash upstreaming at this stage.

Ratings upside is currently restricted by limited deleveraging prospects 
following the proposed dividend recapitalization, and because of the 
fragmented Irish market. Moreover, we believe that further cash remuneration 
to shareholders may occur again in the future. However, we could raise the 
rating if eircom's financial profile were to strengthen substantially beyond 
our base-case scenario, and it sustained adjusted leverage below 4.5x and FOCF 
to debt above 5%.

A downgrade is unlikely. However, we could lower the rating if margins 
declined and FOCF weakened, for example, as a result of intensifying 
competition, higher restructuring costs as part of the group's re-insourcing 
and simplification plan, or more generous returns to shareholders, which would 
constrain medium-term deleveraging. 
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