At the same time, the ratings agency assigned its ‘B+’ issue rating to a proposed EUR250 million term loan facility due 2018 and EUR50 million revolving credit facility due 2016, to be borrowed by RCS & RDS and its parent Cable Communications Systems N.V.
The agency also assigned our ‘B+’ issue rating to the proposed EUR350 million senior secured notes to be issued by Cable Communications Systems and guaranteed by RCS & RDS.
“The rating reflects our assessment of RCS & RDS’ business risk profile as “fair,” including our view of management and governance as “fair,” and its financial risk profile as “aggressive,” S&P said in a statement.
The company’s risk profile assessment is constrained by its exposure to Eastern European markets, its modest profitability, and intense competition from large players, the statement noted.
“More than 80% of RCS & RDS’ revenues are generated in Romania and Hungary, two small economies with volatile currencies that could affect the financial performance of RCS & RDS,” S&P said.
Additionally, RCS & RDS faces intense competition from competitors that are part of large international operators with stronger financial flexibility.
“These weaknesses are partly offset by the company’s state-of-the-art network, solid market shares in its main segments, and a degree of diversification,” the agency noted.
RCS & RDS recently completed the upgrade of 90% of its fiber network in Romania and Hungary to Gigabit Passive Optical Network, or comparable technology, offering speeds of up to 1 gigabit per second and easy connection.
“We think this could attract new Internet customers.”
RCS & RDS owns a 3G network covering 78% of the Romanian population, and coverage will increase further following the acquisition in 2012 of a block of the 900-megahertz spectrum license, S&P said.
“Our financial risk profile assessment is constrained by our anticipation of continued negative free operating cash flow (FOCF) in 2013, and currency mismatches resulting from the company’s euro-denominated debt,” the agency added.
However, the company’s financial vulnerabilities are partly offset by RCS & RDS’ lower leverage than that of most European cable players, “adequate” liquidity, with no or limited debt amortization until 2020, and robust interest coverage, the statement noted.
S&P estimates RCS & RDS will report annual cash from operations of about EUR200 million over the next two years, in line with previous years.
“We also assume that capital expenditures (capex) will decline over time after substantial investments to upgrade fixed and mobile networks,” the ratings agency said.