(The following statement was released by the rating agency)
Oct 4 - Fitch Ratings has affirmed Luxembourg-based satellite operator SES SA's
(SES) Long-term Issuer Default Rating (IDR) at 'BBB' and Short-term IDR at 'F2'. The Outlook is Stable. SES's and SES Global Americas Holding GP's senior unsecured debt has also been affirmed at 'BBB'.
The affirmation reflects SES's highly visible, non-cyclical and geographically diverse revenue streams, supported by its contracts which are typically contracted under long-term agreements (10-15 years) and by its solid underlying demand drivers. These include the increasing capacity requirements associated with a growing number of high-definition TV services, and increasing demand for direct-to-home satellite services in emerging markets.
The Stable Outlook is underpinned by SES's position as one of the leading players in the fixed satellite service sector which is protected by high barriers to entry. Access to the orbital slots needed to operate a geosynchronous satellite is limited and the most desirable orbital slots rarely change hands. Economies of scale are also significant from the point of view of spreading operational and capital spend over a larger fleet and in providing a hedge against the risk of satellite failure.
The challenge for SES is to commercialise its new capacity at a time when its main competitors are also expanding capacity. SES needs to manage pricing as new satellites being brought into service across the industry create regional variations in supply and demand. There is solid growth potential in emerging markets but SES has to manage profitability as revenue per transponder may be lower than in developed markets.
Fitch expects cash flow from operations (CFO) to remain stable over the medium term, underpinned by the high (over 80%) EBITDA margin in the infrastructure segment, which accounted for around 80% of group revenue (before eliminations) in H112. However, SES's free cash flow (after dividends) is expected to be negative in 2012 and 2013, according to Fitch's conservative assumptions. This is because SES is investing EUR3.2bn (cumulatively over 2011-2014, excluding two to four possible incremental satellites to cover Asia-Pacific and Latin America) to replace ageing satellites and increase the capacity of its satellite fleet by 19% by year-end 2014. Also, dividend growth is likely to continue over the medium-term.
SES is committed to maintaining its unadjusted net debt/EBITDA below 3.3x even as the company continues to invest for growth. Fitch considers a ceiling of 3.3x to be consistent with a 'BBB' rating for a business with SES's profile, giving the group an appropriate level of headroom under the 3.5x net debt/EBITDA covenant contained in its U.S. private placement. Net debt/EBITDA was 3.1x at the end of Q212.
The stability and long-term nature of the satellite industry means that significant changes in SES's risk profile are unlikely in the three- to five-year rating horizon given. Potential industry challenges over the longer term are primarily technological (substitution by terrestrial fibre networks or more efficient transponder use than predicted), which could reduce demand. Widespread satellite failure across the fleet could have negative implications for the company's financial profile and rating, but this is mitigated by SES's large fleet and significant unutilised transponder capacity (77% utilisation rate as at 30 June 2012).
SES's liquidity remains healthy. SES had EUR239m of cash and cash equivalents on its balance sheet at the end of June 2012 as well as EUR1.46bn of undrawn committed facilities (mainly coming from its undrawn EUR1.2bn revolving credit facility which expires in 2015). Together, this liquidity should allow SES to cover its EUR110m of commercial paper and debt maturing in H212 and 2013.
WHAT COULD TRIGGER A RATING ACTION?
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- The stability and long-term nature of the satellite industry makes significant changes in SES's risk profile unlikely in the three- to five-year rating horizon. This stable operating environment means that Fitch could tolerate expectations of unadjusted net debt/EBITDA reaching 3.3x before considering a negative rating action.
- Pre-dividend free cash flow margin consistently below 10% would indicate deterioration in the business which could lead to negative rating action.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- SES's rating is constrained at the 'BBB' level by its current leverage policy. While there is potential for upward migration if this policy is tightened, Fitch has no expectation at present that this will occur.
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The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012 is available at
. Applicable Criteria and Related Research: Corporate Rating Methodology (New York Ratings Team)