OREANDA-NEWS. February 09, 2015. Fitch Ratings has maintained Luxembourg-based Sunrise Communications Holdings S.A.'s (Sunrise) Long-term Issuer Default Rating (IDR) of 'BB-' and Mobile Challenger Intermediate Group S.A.'s IDR of 'B+' on Rating Watch Positive (RWP). The most likely outcome of the RWP on Sunrise will be a two-notch upgrade from its current rating to 'BB+' and reflects the company's plan to reduce leverage following today's IPO.

Fitch has also assigned Sunrise's proposed 2022 senior secured notes and Switzerland-based Sunrise Communications AG's bank facilities expected ratings of 'BBB-(EXP)'. The ratings represent a one-notch uplift from Sunrise's prospective IDR of 'BB+' and are contingent upon the resolution of the RWP. The increased notching reflects the senior secured nature of the obligations and the superior recovery prospects relative to the share collateral. The new notes, bank debt and proceeds from the IPO will be used to reduce and refinance Sunrise's existing debt.

The resolution of the RWP and the assignment of any final rating are contingent upon the completion of the refinancing transaction and receipt of final terms of the new debt confirming the information already received and reviewed by Fitch.

Following the refinancing exercise, Fitch intends to withdraw Mobile Challenger Intermediate Group's IDR as well as all ratings of Sunrise's and Mobile Challenger Intermediate Group's existing debt, which will be repaid.

KEY RATING DRIVERS
IPO to Reduce Leverage
Sunrise completed a listing on the Swiss SIX Exchange through a newly formed entity, Sunrise Communication Group AG. The IPO raised primary gross proceeds of CHF1.36bn which are expected to reduce net debt-to-EBITDA to 2.7x from 3.6x in 3Q14 (4.7x including Mobile Challenger's PIK toggle notes), corresponding to funds from operations (FFO) adjusted net leverage of 3.3x-3.4x. Fitch considers FFO-adjusted leverage of less than 3.5x to be consistent with a 'BB+' rating, given Sunrise's operating profile, proposed shareholder remuneration policy and no material change in the competitive and regulatory environment in Switzerland.

The newly listed entity is committed to a CHF135m dividend in 2016, followed by a pay-out ratio of at least 65% of equity-free cash flow thereafter and will return any excess cash flow above its target capital structure, based on leverage level of 2.5x net debt to EBITDA, to shareholders.

Refinancing of Existing Debt
Sunrise has announced that it will refinance all of its existing debt of CHF2.94bn in conjunction with the IPO. The debt will be reduced and replaced by new bank facilities and senior secured notes. The bank facilities will comprise a six-year term loan of CHF1.36bn and a five-year revolving credit facility of CHF200m. The senior secured notes will total CHF500m with a tenure of seven years.

Notching of Instruments
The new bank facilities and senior secured notes are secured against the collateral of shares and intra-group receivables of each obligor or material subsidiary. Based on Fitch's rating methodology, the quality of the security allows both debt forms to be rated one notch above Sunrise's prospective 'BB+' IDR following the resolution of the RWP. As a result, Fitch has rated the bank facilities and senior secured notes at 'BBB-(EXP)' to reflect the superior recovery prospects of the share collateral relative to the total amount of debt that secures the obligations.

The collateral of the senior secured notes will be released upon achieving investment grade status but remains in place until it is released by the senior facilities agreement which governs the bank debt. If the collateral is released, Fitch would view these notes as senior unsecured instruments and their rating will be equalised with Sunrise's IDR.

Stable Market Position Likely
Sunrise has a stable, number two position in the Swiss telecoms market, which 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 19.0% over the past 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-fast 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 mobile 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.

RATING SENSITIVITIES
Sunrise pre-Refinancing
Positive: Future developments that could, individually or collectively, lead to positive rating action include:
- FFO adjusted net leverage below 4.0x (or below 5.0x, including PIKs).
- FFO fixed charge cover above 3.0x (or above 2.5x, including PIKs). FFO fixed charge cover for last 12 months to September 2014 was 1.8x.

Negative: Future developments that could, individually or collectively, lead to negative rating action include:
- FFO adjusted net leverage above 4.5x (or above 5.5x, including PIKs).
- FFO fixed charge cover below 2.5x (2.0x, including PIKs).
- Mid-single digit decline in EBITDA in 2014 and/or expectations of negative FCF, excluding spectrum payments in the next two years.

Mobile Challenger Intermediate Group SA pre IPO
Positive: Future developments that could, individually or collectively, lead to positive rating actions include:
- Positive rating action on Sunrise.

Negative: Future developments that could, individually or collectively, lead to negative rating action include:
- Negative rating action on Sunrise
- An increase in the notching differential from Sunrise's IDR, likely to be driven by an increase in the leverage of the holding company or the issuance of new cash pay debt, with no PIK option.

Fitch has maintained the following ratings on RWP:

Sunrise Communications Holdings SA
Long-term IDR: 'BB-'
Senior secured RCF due 2016: 'BB'
Senior secured notes due 2017: 'BB'
Senior notes due 2018: 'B'

Mobile Challenger Intermediate Group SA
Long-term IDR: 'B+'
Senior PIK toggle notes due 2019: 'B-'

Contact:
Principal Analyst
Anna Martinez
Associate Director
+44 20 3530 1560

Supervisory Analyst
Tajesh Tailor
Director
+44 20 3530 1726
Fitch Ratings Limited
30 North Colonnade
London E14 5GN

Committee Chairperson
Damien Chew, CFA
Senior Director
+44 20 3530 1424

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.

Additional information is available at www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary.

Applicable criteria, 'Corporate Rating Methodology', dated 28 May 2014, are available at www.fitchratings.com.