OREANDA-NEWS. Fitch Ratings has affirmed Denmark-based TDC A/S's (TDC) Long-term Issuer Default Rating (IDR) at 'BBB-'. The Outlook is Stable. A full list of rating actions is at the end of the commentary.

TDC's ratings are underpinned by a relatively strong domestic fixed line position due to owning both cable and copper based networks. Pressures in the business and mobile segment are expected to continue over the next 12-18 months, with significant further declines in EBITDA expected. Fitch expects TDC's funds from operations (FFO) adjusted net leverage will peak at the end of this year at 4.1x (2015: 3.9x) leaving little headroom in its current 'BBB-' rating. However, the potential stabilisation in EBITDA decline over the next two to three years is likely to provide free cash flow (FCF) capacity to gradually improve its leverage headroom while resuming dividend payments in 2017 of DKK1 per share (TDC is expected to pay no dividends in 2016).

KEY RATING DRIVERS
Domestic Weakness
TDC's domestic EBITDA declined by 10.5% year on year in 2015. The decline has been driven by a combination of competitive pressure in the consumer mobile and business segments, the loss of wholesale mobile virtual network contracts and regulatory pressure on broadband wholesale prices and retail roaming. Fitch expects these pressures will persist into 2016, leading to further significant declines in EBITDA driven by revenue loss, margin contraction and investments for its new strategy to stabilise domestic EBITDA. TDC has indicated it has limited scope to reduce costs in its domestic market in the short term.

Strategic Actions to Take Time
TDC is defending a 95% market share of EBIT in its domestic market. The high market share reflects a strong operating position but also the lack of profitability among its main competitors. The company's strategy to stabilise EBITDA aims at preserving market value while also improving its competitive position. This is being achieved by accelerating the upgrade of its products and services, increasing the value of its bundled product propositions, leading the market on price increases where possible and simplifying its process and infrastructure to generate cost savings.

Fitch expects TDC's strategy to stabilise EBITDA will take time to take effect. Our forecasts assume that EBITDA will decline until 2017 with a good chance of stabilisation in 2018. The disparity in profitability between TDC and its competitors creates some uncertainty on future competitive moves. However, market prices, particularly in mobile, are already low and limit the scope for TDC's competitors of building scale through further price reductions.

Fixed Line Supportive
TDC owns both the Danish incumbent copper network and the majority of the cable infrastructure in the country. This gives the company a strong fixed line position compared with all other European incumbents and helps it generate domestic EBITDA margins of 43% in 2015, including headquarter costs. The position is likely to be structurally supportive to TDC's medium- to long-term financial profile due to a lack of alternative fixed line infrastructures. It is reflected in Fitch-calculated FFO-adjusted net leverage downgrade guidance of 4.25x, which is at the higher end of the rating category. Current competitive pressures are more prevalent in the mobile and business segments.

Modest Leverage Reduction Trajectory
TDC's FFO net leverage at the end of 2015 was 3.9x. Fitch expects leverage will marginally increase to around 4.1x between 2016 and 2017. The increase primarily reflects further EBITDA decline and higher interest costs, partially offset by working capital improvements and net debt reduction through organic cash generation. Announced reductions in capital expenditures and dividends will support a gradual reduction in leverage, which our scenario analysis indicates by about 0.1x to 0.3x per year depending on the speed at which EBITDA stabilisation is achieved. TDC's FFO fixed charge cover is likely to remain robust at around 4.0x from 2016 (2015: 5.0x).

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Revenue decline of 5.5% in FY16 and broadly stable from 2017.
- EBITDA margin of 37.5% in 2016 improving to 38% over 2017-19.
- Implied capex to sales in 2016 of 20% reducing to 19% by 2018.
- No cash dividend payments in 2016 and DKK1 per share from 2017.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- The expectation that FFO adjusted net leverage will trend below 3.75x on a sustained basis.
- An improvement in TDC's domestic operating environment enabling a stabilisation in domestic EBITDA.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO adjusted net leverage trending above 4.25x on a sustained basis.
- Further declines in the domestic business putting group pre-dividend FCF margins under pressure into the mid-single digit range.

FULL LIST OF RATING ACTIONS
- Long-term IDR affirmed at 'BBB-'; Outlook Stable
- Senior unsecured notes affirmed at 'BBB-'
- Short-term IDR affirmed at 'F3'
- Subordinated hybrid securities: affirmed at 'BB'