The CFR and PDR have been assigned on a provisional basis until successful completion of the proposed transaction whereby Cool is looking to acquire the outstanding 31% minority shareholding in Hot Telecommunication Systems (HOT or the company), bringing its holding in the Israeli cable operator to 100%. The rating on the new notes is provisional pending completion of this transaction as well as final and conclusive review by Moody's of the final documentation.
As such, the ratings have been assigned at Cool assuming full consolidation of the HOT operations and the new notes at that level.
RATINGS RATIONALE
The (P) Ba3 CFR reflects (i) HOT's strong foothold in the Israeli pay TV market with a market share that has remained stable over the last four years at close to 60%; (ii) the company's advanced and up-to-date infrastructure network providing it with a competitive advantage; (iii) the modest adjusted leverage of around 3.9x at closing of the transaction supported by a strong and rapid deleveraging profile as Mobile's EBITDA breaks-even in 2013.
The rating is constrained by (i) the saturated nature of the TV and broadband markets in Israel where penetration rates are high and subscriber growth hence limited; (ii) the company's relatively small size relative to its direct competitor Bezeq or its global peers; (iii) continued substantial capex spending over the medium term to develop and improve its mobile network (iv) low visibility on future regulatory changes which could impact HOT's competitive advantage.
On 23 August 2012, Cool made an offer to purchase in cash the remaining 31% shares in HOT (expected cost around NIS945 million or USD241 million) as part of this process, Cool will also be required to refinance its outstanding net debt (c. NIS879 millionUSD224 million) and HOT's outstanding secured bank debt (c. NIS1.9 billion or USD 485 million) will also be repaid.
To do so, a senior secured bond of USD700 million equivalent and a senior unsecured bond of USD390 million will be issued at the Altice Financing S.A. and Altice Finco S.A. levels respectively before being on-lent to Cool and HOT at closing of the acquisition of the shares.
HOT is an Israeli group of communications companies that offers pay TV, broadband internet, fixed telephony and, since November 2011, cellular services. The company is the only company to offer triple play services and benefits from a leading position in Pay TV (c.61% market share) and second position in broadband internet (c.40%) and fixed line telephony (c.20%).
The Israeli cable market is shared between HOT and incumbent Bezeq whose Pay TV offering relies on DTH. We believe HOT's position in this concentrated market is protected by the barriers to entry imposed by the high upfront costs a third infrastructure network owner would have to disburse, the long dated nature of building a wide-coverage network against the relatively small size of the addressable population.
On the other hand, with pay TV penetration in Israel of around c. 68%, the outlook for growth in the cable segment remains constrained and reliant on up-selling current services and pushing multi-play subscriptions onto the existing subscriber base bringing in marginal ARPU improvements and RGU increases in the future. In the context of a structurally declining subscriber base (albeit at a slow pace) these efforts will only yield moderate growth and the company is hence looking at its mobile business to drive future growth.
In November 2011, HOT acquired MIRS a mobile operator with an iDEN network and subscriber base of around 4% of the total market. Since then, the company has invested heavily in upgrading its network to 3G and although subscribers have been growing, mobile EBITDA is still expected to be negative by year end 2012.
Moody's will continue to monitor the progress made in the mobile sector and expects this segment to generate positive EBITDA as soon as 2013. The current ratings hence take into account the expected deleveraging profile of the company.
HOT has an adequate liquidity profile with a USD80 million revolving credit facility expected to be undrawn at transaction closing and an overfunding balance of around c.USD86 million. In addition the company generates positive free cash flow and benefits from a long-dated maturity profile. Moody's notes that the coupon on the new notes will be reliant on HOT's ability to upstream dividends to the COOL level. While the amount of distributable reserves at HOT could limit the company's ability to pay out the appropriate amount of dividends, we take comfort in the amount of cash overfunding raised with the new notes at Altice Financing S.A.
The ratings on the two proposed bonds take into account the complex capital structure of the transaction, as well as the security granted to the senior secured bond which in effect is capped at ILS1.9bn. The rating on the senior secured bond also recognises the fact that it benefits from an indirect guarantee from the guarantor group. The instrument rating takes into account the existence of legacy amortising unsecured notes at HOT (c.NIS1.4billion at closing).
OUTLOOK
The stable outlook reflects HOT's stable market share in the Pay-TV, broadband internet and fixed line telephony markets as well as our expectations that future regulatory changes will not materially negatively impact the company's positioning. In addition, the current outlook is premised on HOT achieving its plan of growing its mobile subscriber base and achieve enough momentum in this segment to show substantial deleveraging by year end 2013 on the back of mobile EBITDA improvement.
The stable outlook also takes into account the knowledge and experience of Cool's shareholders in the cable industry and our expectations that financial policy will remain focused on deleveraging rather than aggressive shareholder returns.
Negative pressure on the ratings could develop as a result of (i) leverage trending towards 4.0x on a sustainable basis, (ii) the company's liquidity deteriorating as a result of operating performance; (iii) sudden negative change in the local regulation which would impact HOT's ability to sustain its leading market shares.
Although upwards pressure on the ratings is currently limited by the relatively small size of the business compared with global peers it could develop should the company's leverage fall below 2.75x and FCF/Debt rise to above 7% on a sustainable basis.
The principal methodology used in rating Cool Holding Ltd., Altice Finco S.A., and Altice Financing S.A. was the Global Cable Television Industry Methodology published in July 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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Christian Azzi Analyst Corporate Finance Group Moody'sInvestors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Chetan Modi MD - Corporate Finance Corporate Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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