The outlook downgrade reflects “lower free cash flow generation as a result of lower revenue growth and RCS & RDS’ more aggressive investment plan than previously expected by Moody’s; the company’s weaker liquidity given significant amounts of debt maturities coming due within the next 12-24 months; and uncertainties over the general economic climate in Romania and Hungary, reducing visibility on the company’s operating performance going forward,” the statement reads.
However, Moody’s notes that RCS & RDS raised its subscriber base in the first nine months of 2010 and slightly improved market share in the cable business. Moody’s recognizes that in difficult macroeconomic conditions, the cable business is proving relatively resilient and RCS & RDS continues to benefit from good market positions and business diversification.
According to the rating agency, the company increases its total RGU (revenue generating units) base by 11% in January to September.
Moody’s notes RCS & RDS’ revised strategy in 2010 led to heavier customer-driven and content-related capital expenditures and a recovery in cash flow generation below Moody’s previous expectations. Therefore, Moody’s expects RCS & RDS to generate limited free cash flow in 2010.
RCS & RDS has $175 million debt maturities coming due in 2011 under existing bank agreements and a further $375 million in 2012. The telecom operator intends to partly refinance upcoming maturities with the proceeds of a $100 million bank facility raised in May 2010.
“However, in the absence of an initially explored bond issuance, Moody’s believes liquidity and refinancing risks have increased and expects the company to actively manage its capital structure to fund upcoming short-term maturities, but also to address longer term refinancing risk,” the statement reads.
Whilst Moody’s views positively the company’s diversified business mix and the recent performance of the cable and mobile businesses, its high exposure to Romania and Hungary’s country risk and foreign exchange risk constrains visibility on the company’s future performance.
“Further negative pressure could develop in the absence of a return to meaningful free cash flow generation during 2011 and leverage increases to around 3.0x debt to EBITDA, as a result of sustained higher than expected level of investments or a deteriorating operating performance. A downgrade of RCS & RDS ratings could also be triggered by increased concerns over currency exposure or a weakening of the economic environment in Hungary and Romania or a failure to successfully address maturities coming due within the next 12-24 months,” Moody’s said.
The current rating is constrained by RCS & RDS’ exposure to country and foreign exchange risks, it added.
RCS & RDS is the leading triple and quadruple play cable services provider in Romania, with a growing presence in Hungary, as well as DTH (direct to home) satellite TV operations throughout the Central and Eastern Europe.