OREANDA-NEWS. Fitch Ratings has placed Luxembourg-based Sunrise Communications Holdings S.A.'s (Sunrise) Long-term Issuer Default Rating (IDR) of 'BB-' and Mobile Challenger Intermediate Group's (holding company) IDR of 'B+' on Rating Watch Positive (RWP) following the announcement of the former's planned IPO and refinancing.

The most likely outcome of the RWP will be a two-notch upgrade to 'BB+' Sunrise's Rating, with its resolution subject to the successful listing of the company and use of proceeds to strengthen the balance sheet. Sunrise envisages reducing net debt-to-EBITDA to 2.7x post IPO from 3.6x (3Q14), which would correspond to funds from operations (FFO)-adjusted net leverage of 3.3x-3.4x. Fitch considers this as consistent with a 'BB+' rating, given Sunrise's current operating profile, proposed shareholder remuneration policy and no material change in the competitive and regulatory environment in Switzerland.

KEY RATING DRIVERS

IPO to Reduce Leverage
Sunrise is planning a listing on the Swiss SIX Exchange through a newly formed entity, Sunrise Communication Group AG during 1H15. The IPO is expected to raise primary gross proceeds of about CHF 1.35bn, excluding any 'greenshoe' over allotment options that could increase the IPO size by 15%. The proceeds are expected to reduce net debt-to-EBITDA to 2.7x from 3.6x (4.7x including Mobile Challenger's PIK toggle notes), bringing it closer to a long-term leverage target of 2.5x. The newly listed entity will be committed to a CHF135m dividend in 2016, followed by a pay-out ratio of at least 65% of equity-free cashflow thereafter and will return any excess cashflow above its target capital structure to shareholders.

Redemption of Existing Notes
Sunrise has also announced that it will call all of its existing debt during February 2015. The redemption of the notes is subject to the conditions described in the relevant redemption notice, including the successful completion of the IPO and the availability of new bank financing. Any new instrument ratings will depend on the mix of secured and unsecured debt in the new capital structure.

Stable Market Position Likely
Sunrise has a stable, number two position in the Swiss telecoms market that is dominated by the incumbent Swisscom. Sunrise's predominant strengths are within the mobile segment, where it has increased its mobile revenue share to 20.5% from 19% over the last five years. Sunrise expects 2014 revenue and adjusted EBITDA to have grown 2%-3% yoy.

Competitive Market Environment
Competition in the Swiss telecoms market remains strong, particularly in the fixed-line segment where Cablecom and Swisscom have become more aggressive - and successful - in marketing their multi-play bundles with ultra-broadband speeds. This has placed pressure on Sunrise's fixed-line business, which Fitch views as vulnerable to competition, given its role as an unbundled local loop service provider. We expect fierce competition to continue in this segment over the short-to medium-term due to high broadband and pay-TV penetration rates as well as customer migration towards higher broadband speeds.

Competition in the mobile segment could also increase with the launch of Cablecom's moble product and recent change in ownership of Switzerland's third mobile operator, Orange Communications S.A., following its acquisition by NJJ Capital, a vehicle funded by Xavier Niel, the founder of Iliad in France.

Expected Increase in Leverage
Fitch expects leverage over 2016 and 2017 to increase modestly as a result of remaining spectrum payments, increased cash taxes and dividend payments. This will be partly offset by a reduction in capex, following a period of increased investment for network and set-top boxes for its IPTV service.