Fitch Rates Cellnex's IDRs 'BBB-'; Outlook Stable

LONDON--(BUSINESS WIRE)-- Fitch Ratings has assigned Barcelona based Cellnex Telecom S.A. (Cellnex) a Long-term Issuer Default Rating (IDR) and Senior Unsecured Rating of 'BBB-'. The Outlook on the IDR is Stable.

Cellnex's rating reflects the stability and visibility of revenue streams, which are derived from the long-term, CPI linked contracts of the group's mobile towers portfolio in Spain and Italy and the market position of its TV broadcasting infrastructure in Spain. The issuer has a strong and scalable, cash generative business model with relatively low capital intensity requirements and demand driven growth capex that reduces related investment risks.

Cellnex is currently managing an increase in its leverage profile following the acquisition of Wind's Italian tower business, Galata in March 2015. Fitch expects FFO adjusted net leverage at the end of 2015 to increase to 5.8x from 2.8x in 2014 and to fall below 5.25x in 2016 and continue to decline thereafter depending on the company's dividend policy.

KEY RATING DRIVERS

Long-term Contracts Critical

On a 2015 pro-forma basis, Cellnex derives over 50% of its revenues from its mobile towers business in Spain and Italy and 35% from its broadcasting infrastructure in Spain. The contracts for Cellnex's mobile towers are typically 10 to 15 years long while TV broadcasting contracts are up to five years long. The long duration of the contracts reflect the high dependency of mobile operators and broadcasters on the infrastructure that they rent from Cellnex. The contracts are CPI linked and fixed with a very high chance of renewal for a further 10 to 15 years on terms that have been predetermined as part of the original contracts. This provides long-term visibility and stability to the company's cash flows.

Cash Generative Business Model

Fitch estimates that Cellnex will have a pre-dividend free cash flow margin of around 22% of revenues in 2016. The strong margin is a combination of underlying rental contracts, economies of scale in operations, the pass through of certain costs to clients (e.g. energy costs) and low capital intensity requirements for maintenance of 3% to 4% of revenue. While Cellnex may have further capex related to expansion projects, this is typically deployed with rental sales pre-agreed. Cellnex could further expand its margins depending on the growth of towers, increase in tenancy ratios and rationalisation of mobile towers.

Mobile Industry Growth Supportive

We believe that mobile operators are likely to continue to increase their dependence on tower providers given growth in mobile data and the need to meet geographic coverage obligations for LTE. Cellnex and other tower providers enable the colocation of operators on a single tower. This creates an alternative to network sharing, which helps mobile operators increase capacity and improve coverage while reducing costs. The greatest risk to this growth is market consolidation of mobile network operators which could create a reduction in the demand for mobile towers. Cellnex's existing business however, would be protected by contract in a consolidation scenario.

Risks from TV Broadcasting

The shift in advertising spends away from TV to other forms of media such as the internet, is an industry risk, which creates some uncertainty around the long-term revenue streams of Cellnex's TV broadcast infrastructure business in Spain. A reduction in the number of TV channels could see a decline in frequencies used for broadcasting with consequential revenue loss for Cellnex. There is currently no evidence of the materialisation of this risk in Spain.

Eighty-two percent of Spanish households only view TV via digital terrestrial broadcasting - this is one of the highest proportions in Europe. Cellnex has a leading market position in the sector with a 87% market share on a combined national and regional broadcast basis.

Operating Leases Matched by Revenue

Cellnex has significant operating leases which have contributed EUR 1.0bn to Fitch's adjusted net debt. Cellnex's rating recognises that a significant proportion of these leases are based in Italy, where the average contract duration is higher than the average lease term and the backlog of revenue significantly greater than the total costs of the leases.

Managing an Increase In Leverage

Cellnex recently acquired 90% of Wind's mobile telecom towers business Galata, for EUR693m. Wind has retained a 10% stake in the business and has a put option that can be exercised between July 2016 and July 2020. The acquisition increased both geographic and customer diversification but also increased gross debt to EUR1.0bn from around EUR420m. This has raised FFO net leverage to 5.8x in 2015 from 2.8x in 2014. Fitch believes that Cellnex is likely to deleverage at a rate of 0.4x to 0.5x per year due to its strong cash generation, assuming a conservative dividend policy.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Cellnex include:

--A proforma revenue contribution of around EUR200m in 2015 from acquisitions in Italy offset by a 2.6% fall in Spain driven by the full year effects of channel shutdown within Broadcasting Segment.

--Revenue growth of 15% in FY16 due to full-year acquisition benefits and recovery of Spanish TV broadcasting before stabilising at 2-3% annual growth thereafter.

--EBITDA margin of 37% in 2015 due to dilutive effect of Galata acquisition, increasing to 40% by 2018.

--Annual capex at the upper end of the company's guided range of 8% to 13% of revenues, of which approximately 3.5 percentage points is maintenance capex with the remaining portion attributed to organic expansion projects. No further M&A expenditure is assumed.

--Dividend pay-out around 20% of recurring leveraged free cash flow per year.

--Conservative assumption that Wind exercises its EUR77m Galata Put option in 2016 at first available opportunity.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to an upgrade include:

--A decrease in FFO adjusted net leverage to below 4.5x on a sustained basis could lead to an upgrade to 'BBB'.

-- Fixed Charge Cover of 3.0x

Future developments that may, individually or collectively, lead to negative rating action include:

--Expectation that FFO adjusted net leverage does not fall to 5.0x in two years and remains above 5.0x on a sustained basis.

--Fixed Charge Cover remaining sustainably below 2.5x.

--Free cash flow margins below 10% until 2017.

--A significant deterioration in operating environment, either due to consolidation within the mobile market or market trends in DTT expecting to lead to a material reduction in revenue.

Additional information is available on www.fitchratings.com

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985336

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150526006001/en/

Fitch Ratings
Principal Analyst
James Hollamby
Analyst
+44 20 3530 1656
or
Supervisory Analyst
Tajesh Tailor
Director
+44 20 3530 1726
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
or
Committee Chairperson
Damien Chew, CFA
Senior Director
+44 20 3530 1424
or
Committee Chairperson
Damien Chew
Senior Director
+44 20 7530 1424
or
Media Relations:
Peter Fitzpatrick, London, +44 20 3530 1103
Email: [email protected]

Source: Fitch Ratings

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