Moody's assigns (P) Ba3 CFR to Cool Holding Ltd [EMBIN (Emerging Markets Business Information News]
(EMBIN (Emerging Markets Business Information News) Via Acquire Media NewsEdge) Moody's has today assigned a provisional
corporate family rating (CFR) of (P)Ba3 and a provisional probability of
default rating (PDR) of (P)Ba3 to Cool Holding Ltd. ("Cool"), an
affiliate of Altice Financing S.A. and HOT Telecommunication Systems
Ltd. Concurrently, Moody's has assigned a provisional (P)Ba2 rating to
the proposed USD700 million equivalent senior secured notes due 2019 to
be issued at Altice Financing S.A. and a provisional (P)B2 rating to the
proposed USD390 million senior notes due 2020 to be issued at Altice
Finco S.A. The outlook on the ratings is stable.
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.
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 million USD224 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
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
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).
(c) 2012 EMBIN (Emerging Markets Business Information News) Provided by Syndigate.info an Albawaba.com company
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