(ADPnews) - Mar 8, 2011 - JCR affirmed today its A rating with a "stable" outlook on the foreign currency long-term senior debts of France Telecom SA (EPA:FTE).
The agency issued the following press release:
JCR Affirms A Ratings on France Telecom; Outlook Stable
Issuer: France Telecom S.A.
FC (Foreign Currency Long-Term Senior Debts): A (Stable)
Issues Amount (bn) Issue Date Due Date Coupon Rating
Yen Bonds First Series JPY 46.1 Jun. 29, 2010 Jun. 29, 2015 1.23% A
Yen Floating Rate JPY 6.2 Jun. 29, 2010 Jun. 29, 2015 3M Yen A
Bonds First Series LIBOR+0.67%
JCR has affirmed its A ratings on the foreign currency long-term senior debts and on the bonds issued by France Telecom S.A. (FT).
The rating primarily reflects the FT group's leading position in the French fixed and mobile telephony markets, geographically diversified revenue structure that encompasses Europe, emerging Europe and Africa, and its prudent financial policy. On the other hand, the ratings are constrained by its relatively large interest-bearing debt and the intensifying competitive pressure mainly in developed countries.
The rating outlook is stable. The declining mobile termination rate necessitated by regulatory change and the intensifying competitive pressure mainly in the European telecommunications market have been putting downward pressure on FT's earnings. Nonetheless, it has managed to keep its revenue and earnings little changed in 2010 excluding the impact of regulatory revisions thanks to the group's strategy to focus on increasing profitable customers instead of capturing market share. The group's interest-bearing debt has been decreasing consistently backed by the repayment based on the free cash flow through the restraint on large-scale M&A and the capex. The net debt/EBITDA ratio has stayed below the targeted 2.0 (1.95 at the end of 2010). JCR expects the group to maintain its strong debt repayment capacity and financial flexibility through its prudent financial policy and stable cash flow generation.
(1) Solid operating base centering on France
FT is one of the world's leading telecommunications companies. The group provides wide-ranging services from fixed to mobile telephony, data communications, Internet and multimedia to individuals, corporate customers, multinational companies and other telecom operators. The group's customers exceeded 209 million at the end of 2010 (up 6.0% from the end of 2009), including 150 million mobile customers, which has been contributing to the increase. As an incumbent telecom operator, it holds an extremely solid position in the domestic market with a 75% share in the traditional public switched voice traffic, a 46% share in the ADSL broadband (which accounts for 90% of the country's Internet connections), and a 47% share including MVNOs in the domestic mobile market where three players and a number of MVNOs compete with each other.
The group's overseas footprint covers more than 30 countries as a result of its international business expansion strategy that started in the 1990's. In Poland, the group holds a leading position with a share of almost 72% in the fixed telephony market and a 30% share in the mobile telephony market. FT also holds a share of about 21% in the mobile markets in the Spain. Besides, the integration of FT's wholly-owned subsidiary Orange UK and one of its competitors T-Mobile UK through the joint venture completed in April 2010 is expected to strengthen the group's operation base in the UK, the most competitive market in Europe. The group also has a strong presence in developed European countries such as Belgium and Switzerland, and emerging European countries (including Romania and Slovakia where it ranks top) and, in particular, in African countries (including Egypt), where growth potential is high. FT operates in 17 African countries including 14 countries, where it ranks top or second and competes for top market shares with few other competitors. As the wireless telephony penetration rate in Africa is still at a developing stage, the market is expected to continue expanding in medium and long-term, despite political uncertainty in the region, and to contribute to its earning. FT has strategy to double its revenue from emerging market through opportunistic M&A and organic growth by 2015. FT acquired 40 % of Meditel, the second largest mobile operator in Morocco.
(2) FT will maintain a stable profitability thanks to strategy to focus on increasing profitable customers
FT stayed resilient to the global economic downturn, with only a limited impact on its earnings, thanks to the solid earning performance in French operation and its diversified revenue structure. Earnings capacity remains at an acceptable level as EBITDA margin averaged 35.2% in the three years to 2010. The group's operation base is diversified regionally, with 49% of sales made in France, 9% in Poland, 8% in Spain, 17% in other regions including emerging Europe and Africa, and 15% in the corporate sector in 2010. The share of emerging Europe and Africa in its group sales is increasing.
In 2010, the group's revenue and EBITDA totaled EUR45.5 billion and EUR15.6 billion, down 1.4% and 3.9% year-on-year on comparable basis respectively, due to the impact of the rate cuts brought by the revised regulations and the intensifying competitive pressure. Still, it managed to keep its revenue and EBITDA almost flat, barring the impact of foreign exchange fluctuations, changes in its scope of consolidation and regulatory revisions on mobile termination rate cuts . This is due to its strategy to focus on increasing profitable customers with higher ARPU. The provision of new convergence services of fixed and mobile telephony and tariff segmentation by customers and its adoption of customer loyalty programs also contributed to maintain its revenue. FT's share of contract customers in its European mobile customer base is around 55%, relatively higher than those of its European peers. In addition to its strategy to focus on increasing profitable customers, FT is pushing ahead with a cost restructuring program to retain its profitability. It realized EUR 620 million in cost savings in 2010. JCR holds that FT will maintain a stable profitability.
(3) FT will maintain its financial flexibility through its prudent financial policy
The group's interest-bearing debt has been decreasing consistently since 2004 backed by the repayment based on the free cash flow through the restraint on large-scale M&A and the policy to keep the capex/sales ratio at around 12-13%. The net debt/EBITDA ratio has stayed below the targeted 2.0 since 2007 (1.95 at the end of 2010). The net debt to equity ratio at the end of 2010 also improved to 1.4 from 3.0 at the end of 2004. FT maintains a good access to the capital market and has an ample liquidity with EUR4.9 billion in cash and equivalents and EUR7.5 billion in undrawn credit lines at the end of 2010, more than enough to cover its EUR1.9 billion debt repayment due in 2011. FT's management in February 2011 reaffirmed its commitments to generate EUR8.0 billion in annual organic cash flow and keep the net debt/EBITDA ratio around 2.0. JCR expects the group to maintain its strong debt repayment capacity and financial flexibility through its prudent financial policy and stable cash flow generation.
(JPY 100 = USD 1.214/EUR 0.869)
(EUR 1 = USD 1.398)
Rating agency website: www.jcr.co.jp
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