KKR, Moody’s assigns Ba1 rating to vehicle for the purchase of TIM network

(Teleborsa) – Moody’s assigned a long-term corporate family rating (CFR) “Ba1” and a probability of default rating “Ba1-PD” a Optics BidCoan acquisition vehicle indirectly owned by KKR which is expected to acquire the entire fixed network in Italy of Telecom Italia (TIM, B1 Ratings Under Review), also called NetCo. At the same time, Moody’s assigned a Ba1 rating to the senior secured bond proposals that will be issued by Optics in relation to the bond exchange offers launched by the TIM group. L’outlook on ratings is stable.

The securities, which could be split into EUR- and USD-denominated securities, are expected to have a maximum cumulative amount of €5 billion. The results of the exchange offer would be considered part of the acquisition price and Optics will not receive any cash proceeds after it takes effect. Following completion of the proposed acquisition, Optics will be the parent company of NetCo. Therefore, the CFR assigned to Optics consolidates NetCo’s legal and financial obligations and reflects the overall debt characteristics of the new Optics group. The assigned ratings assume the successful completion of the planned acquisition.

The Ba1 CFR primarily reflects NetCo’s underlying credit quality, which it is expected to become the largest independent fiber network in Europe. NetCo is the only ADSL and FTTC provider in Italy and is accelerating the expansion of its FTTH network. Optics’ Ba1 rating reflects (1) the size and essentiality of the service NetCo provides to families and businesses through multiple technologies; (2) positioning as a market leader in fixed access networks and national coverage; (3) limited competition and network overlap, especially present in highly populated areas (so-called black areas); (4) the limited risk of technological substitution, due to the lack of cable infrastructure in Italy which makes FTTC and FTTH the most reliable fixed line broadband options; and (5) the stability and predictability of NetCo’s revenues, given the growing demand for speed and data services, which is expected to accelerate the adoption of fixed broadband and ultra-broadband services, and the high percentage of NetCo’s services subject to to periodic price determinations by AGCOM, or quasi-regulated by long-term wholesale agreements with telecommunications operators (including the framework service contract that will be signed with TIM for an initial period of 15 years).

However, the CFR Ba1 is constrained by the execution risks linked to the separation of fixed network operations from TIM. Given the broad scope and complexity of the separation process, NetCo may face organizational challenges or additional costs which could hinder its ability to improve its operational performance and weaken the company’s credit metrics. Furthermore, the CFR Ba1 also takes into account NetCo’s ambitious FTTH deployment plan which aims to cover 65% of Italian households by 2027, which will result in a total capital expenditure (including discretionary growth investments) of approximately 1.5-2 billion euros per year over the next three years. Such an investment plan is subject to execution and cost overrun risks, particularly in the context of a newly created entity. Moody’s predicts that the NetCo’s free cash flow will remain negative at least until the end of the roll-out program, leading to a substantial increase in debt levels. However, the pace of debt accumulation will depend on NetCo’s cash flow generation and its ability to make those investments. Furthermore, Moody’s sees the resulting FTTH network as a vital tool for customer loyalty and, if successful, will be positive for NetCo in the long term.

Overall, Moody’s expects NetCo to submit high financial leveragewith a adjusted gross debt close to 12 billion euros (including leasing and pension liabilities), which will result in an adjusted debt/EBITDA ratio near 6x and funds from operations (FFO)/net debt of approximately 12% by the end of 2024. This high leverage it does not provide the company with significant flexibility to absorb negative shocks or unexpected events. However, the rating incorporates the assumption that shareholders will take a balanced approach to dividend distributions and phasing of investment projects. Once the acquisition is completed, Moody’s expects Optics to focus on managing NetCo, with no significant M&A activity expected in the coming years.

(Teleborsa) 18-04-2024 13:12