OREANDA-NEWS. Fitch Ratings affirmed Global Cloud Xchange Limited's (GCX) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'B+'. The Outlook is Stable.

Fitch has also affirmed GCX Limited's USD350m 7% senior secured guaranteed notes at 'BB+' and Recovery Rating of 'RR1'. GCX Limited is a wholly owned subsidiary of GCX. The notes are secured by the assets and equity interests of GCX and its key subsidiaries, and guaranteed by GCX and its key operating subsidiaries.

KEY RATING DRIVERS

Reduced Ratings Headroom: Fitch believes that GCX's FFO-adjusted net leverage could deteriorate to 3.7x-3.8x in the financial year ending 31 March 2017 (FY17) from 3.2x in FY15 due to lower cash generation amid industry overcapacity. That would bring the leverage level closer to 4.0x, the level at which Fitch would consider negative rating action. We forecast that FY16 FFO could decline to around USD58m-60m (2014: USD79m) on lower indefeasible right of usage (IRU) sales of USD60m (2014: USD67m) and higher interest expense. Interest expense will increase to USD25m in FY16, the first full financial year following the issue of the USD350m 7% secured bond.

Chronic Industry Oversupply: We believe that the industry will continue to remain oversupplied as the increase in bandwidth continues to outpace demand growth, with commissioning of submarine cables by "over-the-top" operators and telecommunication companies. Furthermore, technological advancements will continue to improve the capacity of existing cables. Hence, despite growing demand, bandwidth tariffs will continue to decline and we expect price erosion for bandwidth suppliers, such as GCX, over the medium term.

Minimal FCF Despite Lower Capex: Fitch forecasts GCX's FY16-17 FCF to be minimal as cash flow from operations will be just sufficient to fund capex. Capex will be lower at USD40m-45m (around 9%-10% of revenue, FY15: USD18m, 4% of revenue) as management now plans to buy capacity on the India-Singapore and Tokyo-Seattle routes instead of laying its own cables. Capex could however rise, if management plans to invest further in fibre to meet growing data demand in India.

Bond Rated Higher Than IDR: GCX Limited's USD350m 7% senior secured guaranteed bond is rated three notches higher than the IDR. The bond is guaranteed by all the key operating companies, which generate most of group revenue and EBITDA. The 'RR1' Recovery Rating reflects our calculations of high recovery in a stressed situation - based on our assessment of the distressed going-concern enterprise value of GCX's cable networks.

Adequate Liquidity: GCX's cash balance of USD84m at end-June 2015 and annual cash EBITDA of about USD90m are sufficient to fund its annual interest expense of USD25m and capital leases of USD21m. GCX's only debt of USD350m is due in 2019. The secured bond documents contain restrictive terms and conditions, which ring-fence the cash within GCX group to avoid any cash leakages through dividends or inter-company loans to the parent entity.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Annual IRU sales of about USD60m.
- Tax payment of USD5m, including settlement of USD4m in French litigation case in FY16.
- Annual FY16 capex of about USD40m-USD45m.
- No dividends.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Sustained negative FCF generation
- A deterioration in the operating environment and/or evidence of the parent accessing cash from GCX and negatively affecting GCX's credit profile resulting in FFO-adjusted net leverage rising to over 4.0x (FY16-17 forecast: 3.7x-3.8x) on a sustained basis.
- FFO interest charge coverage falling below 3.0x on a sustained basis. (FY16-17 forecast: 3.3x).

Positive: Although an upgrade is unlikely in the next 12-18 months, future developments that may, individually or collectively, lead to positive rating action include:
- Consistent generation of positive FCF.
- A substantial increase in scale and absolute EBITDA generation.
- FFO-adjusted net leverage falling below 2.5x on a sustained basis.