Fitch Revises KPN's Outlook to Positive
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Fitch Ratings has revised the Outlook on Royal
KPN's debt ratings to Positive from Stable. Fitch has affirmed KPN's IDR
and senior unsecured rating at 'BBB '.
The revision in Outlook to Positive reflects Fitch's view that leverage over
the next 12 to 18 months is likely to improve, following the sale of the
company's Belgian mobile subsidiary BASE and growing cashflows from the
company's domestic operations. Funds from operations (FFO) adjusted net leverage
is expected to fall below 3.5x by 2016, from 3.8x in 2014, a level that in
conjunction with stabilising EBITDA trends would be compatible with a rating of
'BBB'.
Fitch expects the Dutch telecoms market to remain highly competitive;
however, the incremental impact of competition on the group's financial
performance should be manageable.
Improving Operational Trends
Following the sale of KPN's international mobile operations, the company's
operational profile is predominantly driven by its domestic operations in the
Netherlands. Adjusted EBITDA in the Netherlands has been declining by 11% to 13%
per year over the past three years. We expect the rate of decline to slow to
below 4% over the course of 2015 before stabilising in 2016. First quarter
results indicate that 2015 performance is trending better than our expectations.
The stabilisation will be driven by a mix of factors which include: lower
incremental impact from regulation; the loss of revenue from legacy products
such as voice and tariff decreases; off-set by stabilising market share in
mobile; cost reduction; and growth in fibre-related broadband and convergent
products.
Growing Free Cash Flow (FCF)
Fitch expects KPN's pre-dividend FCF to turn positive in 2015 and to grow
progressively thereafter. The growth in cashflow will be driven by stabilising
EBITDA, minimal cash tax payments, capex reductions and reduced interest
charges. The reduced cash tax and interest charges result from the sale of
E-Plus in 2014. KPN sold the asset to Telefonica Deutschland for EUR4.9bn plus a
20.5% stake in the German telecom group. The sale created a nine-year deferred
tax asset of EUR 1.2bn with a proportion of the cash proceeds used to reduce
debt.
Capex Likely to be Cut
KPN has rolled out a significant proportion of its LTE and fibre network,
which will enable it to reduce capex in the next two years. KPN is guiding capex
reduction of approximately EUR200m in 2015 to EUR1.4bn (including BASE Company),
from EUR1.6bn in 2014. The reduction includes the impact from the consolidation
of Reggefiber.
Asset Sales Provide Flexibility
KPN recently announced the sale of its Belgian mobile subsidiary BASE Company
to Telenet (B+/Stable) for EUR1.325bn. The proceeds from the sale, combined with
lower operational leases, have the potential to reduce KPN's FFO adjusted net
leverage by up to 0.3x if all of the proceeds are used to reduce debt. We have
not assumed the sale of KPN's 20.5% stake in Telefonica Deutschland in our
rating case but have factored in dividends from the German mobile company of
approximately EUR140m per annum which KPN expects to pass onto its shareholders
in 2015. It is likely that KPN will sell down the stake over time. The impact of
the sale would have the potential to further reduce FFO adjusted net leverage by
up to 0.9x.
Fitch expects KPN to use some of the proceeds from the sale of assets to
reduce leverage. The company may also use sales proceeds for M&A and
shareholder remuneration. We also expect the company to maintain a measured
shareholder remuneration policy, reflecting some risks to achieving EBITDA
stabilisation and a desire to maintain an investment grade rating.
Dutch Market to Remain Competitive
Fitch expects the Dutch market to remain competitive but it is unlikely that
market conditions will deteriorate considerably from current levels. The
consolidation of cable operators Ziggo and UPC will create a stronger competitor
for KPN in residential triple play that will look to grow into other segments
such as SME and mobile. The launch of Tele2's mobile network also remains a risk
in the event Tele2 takes a very aggressive approach to its pricing policy driven
by a potentially short-term need to fill network capacity. However, KPN already
has elevated mobile subscriber acquisition and retention costs, which we believe
will continue to be the case, and its move to deploy mobile tariffs with greater
data bundles along with attractive fixed-mobile bundles will provide a degree of
defence
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