Primary Credit Analyst: Lukas Paul, Frankfurt (49) ;

Transcription

1 Primary Credit Analyst: Lukas Paul, Frankfurt (49) ; Secondary Contact: Xavier Buffon, Paris (33) ; Table Of Contents Rationale Outlook Our Base-Case Scenario Company Description Business Risk Financial Risk Liquidity Covenant Analysis Government Influence Ratings Score Snapshot Reconciliation Related Criteria And Research MAY 18,

2 Business Risk: STRONG Vulnerable Excellent a- a- a CORPORATE CREDIT RATING Financial Risk: INTERMEDIATE A/Stable/-- Highly leveraged Minimal Anchor Modifiers Group/Gov't Rationale Business Risk: Strong Leading position in fixed and mobile markets in Switzerland, a wealthy, quality-conscious service area. High-quality fixed and mobile networks. Favorable regulation compared with European peers. Intense competition in certain segments, such as in telecom services for business customers. High capital expenditures to maintain and upgrade the high-quality network. Mature and saturated domestic telecom market that has limited growth prospects. Financial Risk: Intermediate S&P Global Ratings-adjusted debt-to-ebitda of maximum 3x and funds from operations to debt of at least 30% in our forecast. Conservative and predictable financial policy. Predictable, if somewhat inflexible, dividend policy. Significant capital expenditures that continue to weigh on free operating cash flow. MAY 18,

3 Outlook: Stable The stable outlook on telecommunications operator Swisscom AG reflects S&P Global Ratings' view that the group will continue to successfully defend its core domestic market positions, further increase bundle penetration in its customer base, and successfully mitigate ongoing declines of domestic service revenues with additional cost savings. The stable outlook also factors in our expectation that the group's adjusted debt-to-ebitda ratio will stay at about 2.5x and its adjusted ratio of funds from operations (FFO) to debt will be approximately 35% over In addition, we expect the Swiss government will retain its majority ownership of Swisscom for the next few years. Downside scenario We could lower our rating if Swisscom's competitive position weakened unexpectedly or if we observed mounting and sustained pressure on EBITDA, for example, as the result of failure to offset pricing pressures through continuous cost optimization. We could also lower the rating if adjusted debt to EBITDA deteriorated toward 3.0x and FFO to debt toward 30%. Alternatively, privatization of the group could lead to a one-notch downgrade to align the rating with our assessment of its stand-alone credit profile (SACP), but we think the risk of this occurring is slim. Upside scenario We could raise our rating on Swisscom if its adjusted debt-to-ebitda ratio improved to below 2x on a sustainable basis. This strengthening would require the group to post stronger revenue and EBITDA growth and revise its financial policy to be even more conservative, which we think is unlikely at this stage. Our Base-Case Scenario We expect that Swisscom's credit metrics for the next few years will be determined by its conservative financial policy, and its ability to contain EBITDA pressure emanating from decreasing telecom service revenues in the domestic market. MAY 18,

4 Assumptions Revenue decline of up to 1% in 2017, after a decline of 0.3% in 2016, and approximately flat revenues in 2018, reflecting lower telecom service revenues in Switzerland, offset by growth in information and communications technology (ICT) services and growth at subsidiary Fastweb. Decreasing adjusted EBITDA margins of 36.5%-37.5% in 2017 and 36.0%-37.5% in 2018, compared with 37.8% in 2016, due to the decline of high-margin domestic service revenues and some margin dilution from ICT services, which cost savings in Switzerland only partly compensate. Continued high capital expenditures (capex) of 20%-22% of revenues in , excluding spectrum, after about 21% in 2016, owing in particular to the group's high-speed broadband rollout in Switzerland and Italy. Stable dividend payouts of Swiss franc (CHF) 22 per share in 2017, as announced by Swisscom, and at the same level in Key Metrics 2016a 2017f 2018f EBITDA margin (%)* Debt to EBITDA (x)* FFO to debt (%)* FOCF to debt (%)* All data adjusted by S&P Global Ratings. FFO--Funds from operations. FOCF--Free operating cash flow, defined as cash flow from operations after investments in property, plant, and equipment, and intangible assets. f--forecast. Company Description Swisscom is the leading telecommunications operator in Switzerland, offering fixed and mobile telephony, Internet access and TV services for residential and corporate customers, as well as ICT solutions for businesses. Swisscom also owns 100% of Italian fixed-line operator Fastweb. In addition to fixed-line broadband, voice, and TV services, Fastweb provides mobile telephony services as a mobile virtual network operator (MVNO). At the end of the first quarter of 2017, Swisscom served about 6.6 million mobile, 2 million retail broadband, and 1.4 million TV subscribers in Switzerland, as well as 2.4 million broadband subscribers in Italy. The largest shareholder, with a 51% stake, is the federal government of the Swiss Confederation. Business Risk: Strong Our assessment of Swisscom's business risk continues to benefit from its strong market positions across both business and residential customer segments in Switzerland. As of Dec. 31, 2016, Swisscom's market share of mobile subscriptions was about 60%, ahead of competitors Sunrise and Salt, with about 22% and 17%, respectively, and it held 54% of the market for retail broadband connections (all figures according to Swisscom). In addition, Swisscom has successfully used its Internet-Protocol-TV (IPTV) offering to increase its market share in TV services in the past few years to about 32% at the end of 2016, according to group estimates, ahead of cable operator UPC with 28%. MAY 18,

5 In our view, Swisscom's market position is supported by its high-quality fixed-line and mobile networks. By the end of 2016, the group was able to offer fast broadband, with download speeds of at least 50 megabits per second (Mbps), to about 70% of all Swiss residential and business premises, and aims to make available minimum speeds of 100 Mbps for 85% of homes and businesses by Although Swisscom employs a mix of network technologies, about 30% of its current network has been upgraded with fiber-to-the-home (FTTH), currently the fastest fixed-line technology. The company currently offers about 99% of the Swiss population 4G mobile network coverage. We note, however, that one of Swisscom's competitors, Sunrise, had also managed to extend 4G coverage to this level as of the end of 2016, compared with more than 85% at the end of 2014, according to data published by Sunrise. We continue to view operating trends at Swisscom's subsidiary Fastweb as increasingly robust, balancing our assessment that economic and market conditions in Italy are less benign than those in Switzerland. Fastweb benefits from ongoing investments in its fiber network, the lack of competition from cable operators, and growth in Italy's fixed broadband penetration. It has therefore been able to expand its broadband subscriber base by more than 6% each year for the past three years, overtaking Wind in terms of subscribers in 2016 and now ranking second with a market share of 15.9% after Telecom Italia with 48.7% (data according to Swisscom). At the end of 2016, Fastweb was able to serve 30% of Italian households and business sites with download speeds of 100 Mbps or more based on its own FTTH and fiber-to-the-street (FTTS) network. By 2020, the company aims to offer 50% of Italian households and businesses speeds of up to 200 Mbps. Part of the rollout will be achieved through a joint venture with Telecom Italia, which is designed to increase FTTH coverage to 5 million households and businesses compared with 2 million currently on Fastweb's own network. However, we acknowledge that plans by Italian utility company Enel SpA to roll out FTTH for several million homes could intensify competition in areas where networks overlap. We expect the regulatory environment in Switzerland to remain relatively benign compared with other European markets. For example, unlike other incumbent operators in EU countries, Swisscom is not subject to access and price regulation for its high-speed broadband network. Although a review of Swiss telecom legislation is under way, we do not currently expect a significant tightening of regulatory oversight, and the legislative process is likely to take several years. We think Swisscom's business strengths are partly balanced by the need for substantial investments to maintain and upgrade its network infrastructure. Capex totaled about 21% of revenues in , and we expect annual capex to remain at 20%-22% for the next three years. The domestic market for telecom services is highly saturated, which we expect will limit Swisscom's growth opportunities. Moreover, the group continues to be exposed to intense competition for connectivity solutions for enterprise customers, and, in our opinion, competition is also increasing for certain products for consumers and small and midsize enterprises. In addition, our assessment of Swisscom's business risk is constrained by the group's moderate geographic diversification. MAY 18,

6 Our Base-Case Operating Scenario Switzerland: Revenue declines of 1%-2% in 2017 and 0.5%-1.5% in 2018, owing to lower roaming revenues particularly in 2017, general price pressure for connectivity services, and continued structural decline of the classic fixed voice segment, partly counterbalanced by growth of multiple-play subscriptions in the consumer segment and ICT services revenues with business customers. Italy: Mid-single-digit revenue growth at Fastweb in the next two years, based on solid growth in consumer broadband subscriptions and Fastweb's new MVNO mobile product. Modest weakening in the group's adjusted EBITDA margins in the next two years, attributable to the loss of high-margin domestic roaming and other service revenues and some margin dilution from ICT services. We think these will only partially be compensated by ongoing cost efficiency measures in Switzerland. Peer comparison Table 1 Swisscom AG -- Peer Comparison Industry Sector: Diversified Telecom Swisscom AG Telia Company AB Telenor ASA Proximus S.A. Rating as of May 18, 2017 A/Stable/-- A-/Negative/A-2 A/Stable/A-1 A/Stable/A-1 (Mil. CHF) --Fiscal year ended Dec. 31, Revenues 11, , , ,297.7 EBITDA 4, , , ,908.2 Funds from operations (FFO) 3, , , ,659.0 Net income from continuing operations 1, , Cash flow from operations 3, , , ,687.9 Capital expenditures 2, , , ,031.6 Free operating cash flow 1, , , Discretionary cash flow (697.5) Cash and short-term investments , , Debt 10, , , ,738.1 Equity 6, , , ,196.5 Adjusted ratios EBITDA margin (%) Return on capital (%) EBITDA interest coverage (x) FFO cash interest coverage (x) Debt/EBITDA (x) FFO/debt (%) Cash flow from operations/debt (%) Free operating cash flow/debt (%) Discretionary cash flow/debt (%) 2.5 (8.0) CHF--Swiss franc. MAY 18,

7 Financial Risk: Intermediate Our assessment of Swisscom's financial risk largely reflects the group's conservative and predictable financial policy, which targets a net debt-to-ebitda ratio of about 1.9x, as per the group's definition. Equally, we perceive Swisscom's dividend policy as fairly predictable, underpinned by a track record of constant payouts of about CHF1.1 billion per year since That said, we consider that the group's declared objective to pursue stable dividends may somewhat limit its willingness to adjust distributions downward, if necessary. We expect that Swisscom's financial policies will support adjusted debt to EBITDA of 2.4x-2.6x and adjusted FFO to debt of 33%-36% in the next three years. At the same time, we think Swisscom's FOCF will remain depressed by the need for continued network investments, which are likely to prevent FOCF from improving toward 15% of adjusted debt in the next three years. Our Base-Case Cash Flow And Capital Structure Scenario Significant capex of 20%-22% of revenues, excluding spectrum, in 2017 and 2018, in particular due to investments in high-speed broadband in Switzerland and Italy. Reported FOCF of CHF1.0 billion CHF1.2 billion annually in 2017 and 2018, compared with about CHF1.3 billion in Sizable, but stable dividends of about CHF1.15 billion annually in 2017 and 2018, including dividends to minorities. Financial summary Table 2 Swisscom AG -- Financial Summary Industry Sector: Diversified Telecom --Fiscal year ended Dec (Mil. CHF) Revenues 11, , , , ,384.0 EBITDA 4, , , , ,490.5 Funds from operations (FFO) 3, , , , ,819.3 Net income from continuing operations 1, , , , ,755.0 Cash flow from operations 3, , , , ,103.3 Capital expenditures 2, , , , ,561.0 Free operating cash flow 1, , , , ,542.3 Discretionary cash flow Cash and short-term investments Debt 10, , , , ,039.4 Equity 6, , , , ,318.0 Adjusted ratios EBITDA margin (%) Return on capital (%) EBITDA interest coverage (x) MAY 18,

8 Table 2 Swisscom AG -- Financial Summary (cont.) Industry Sector: Diversified Telecom --Fiscal year ended Dec (Mil. CHF) FFO cash interest coverage (x) Debt/EBITDA (x) FFO/debt (%) Cash flow from operations/debt (%) Free operating cash flow/debt (%) Discretionary cash flow/debt (%) CHF--Swiss franc. Liquidity: Adequate We assess Swisscom's liquidity as adequate because we expect that liquidity sources will cover uses by more than 1.2x over the 12 months from April 1, We also think the group has sound relationships with banks, a high standing in the credit markets, and generally prudent risk management. Principal Liquidity Sources As of April 1, 2017, principal liquidity sources over the ensuing 12 months include: About CHF410 million in cash balances and short-term financial investments. Two undrawn committed unsecured revolving credit facilities of CHF1 billion each, due August 2020 and March 2022, respectively. Annual FFO of CHF3.5 billion-chf3.7 billion. Principal Liquidity Uses Principal liquidity uses over the same period include: Capex of CHF2.4 billion-chf2.5 billion. Debt maturities of about CHF0.9 billion. Approximately CHF1.15 billion in annual dividends. Debt maturities As of Jan. 1, 2017*: 2017: CHF882 million 2018: CHF1,521 million 2019: CHF342 million 2020: CHF809 million 2021: CHF535 million 2022: CHF500 million Thereafter: CHF2,757 million *Includes bank loans, bonds, and private placements. MAY 18,

9 Covenant Analysis Change-of-control clauses exist in the group's bank loans, bonds, and private placements. The bank loans would be due for immediate repayment if Switzerland's stake in Swisscom were to fall below one-third, or if another shareholder were to take control of the group. Bondholders would be entitled to sell the bonds if another shareholder gained a majority share in Swisscom and at the same time the long-term corporate credit rating on the group fell below 'BBB-'. Under one of its credit agreements, Swisscom is subject to a maintenance covenant relating to net debt to EBITDA. We forecast ample headroom of more than 40% under this covenant in the next 2 years. Government Influence Our rating on Swisscom incorporates a notch of uplift reflecting the group's status as a government-related entity (GRE) and our view that it has a moderate likelihood of receiving timely and sufficient extraordinary government support in the event of financial distress. This is based on our assessment of Swisscom's: Strong link with the Swiss government, primarily because the latter defines Swisscom's strategic goals and is unlikely, in our view, to reduce its majority ownership stake in the next few years; and Limited importance of its role for the government, as the government is primarily interested in the stability of Swisscom's operations. It is less interested in Swisscom's credit standing, in our opinion. Ratings Score Snapshot Corporate Credit Rating A/Stable/-- Business risk: Strong Country risk: Very low Industry risk: Intermediate Competitive position: Strong Financial risk: Intermediate Cash flow/leverage: Intermediate Anchor: a- Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Financial policy: Neutral (no impact) Liquidity: Adequate (no impact) Management and governance: Strong (no impact) MAY 18,

10 Comparable rating analysis: Neutral (no impact) Stand-alone credit profile : a- Related government rating: AAA Likelihood of government support: Moderate (+1 notch from SACP) Reconciliation We add back to cash flow from operations (CFO) the payment of a CHF186 million fine imposed on Swisscom in connection with a ruling by the Swiss Federal Competition Commission because we consider it nonrecurring. For the same reason, we reduce EBITDA, FFO, and CFO by CHF60 million in onetime income and cash inflow following a successful legal settlement in Italy. Other adjustments mainly relate to our standard adjustments for operating leases, unfunded defined-benefit postretirement obligations, asset retirement obligations, share-based compensation expense, gains/losses on disposals of property, plant, and equipment, and capitalized interest. In calculating surplus cash, we include CHF144 million of noncurrent fixed interest-bearing deposits, but deduct CHF74 million of other current financial assets, which we consider are not freely accessible and/or not sufficiently liquid. Table 3 Reconciliation Of Swisscom AG Reported Amounts With S&P Global Ratings' Adjusted Amounts (Mil. CHF) Swisscom AG reported amounts Debt Shareholders' equity EBITDA --Fiscal year ended Dec. 31, Operating income Interest expense EBITDA Cash flow from operations Capital expenditures Reported 8, , , , , , ,416.0 S&P Global Ratings' adjustments Interest expense (reported) Interest income (reported) Current tax expense (reported) (168.0) (305.0) Operating leases Postretirement benefit obligations/deferred compensation 1, (66.4) -- Surplus cash (576.0) Capitalized interest (6.0) (6.0) (6.0) Share-based compensation expense Dividends received from equity investments Asset retirement obligations (66.7) (59.7) -- MAY 18,

11 Table 3 Reconciliation Of Swisscom AG Reported Amounts With S&P Global Ratings' Adjusted Amounts (Mil. CHF) (cont.) Non-operating income (expense) Reclassification of interest and dividend cash flows Non-controlling interest/minority interest (140.0) Debt - Derivatives (63.0) EBITDA - Gain/(Loss) on disposals of PP&E EBITDA - Settlement (litigation/insurance) costs OCF - Payments / receipts related to litigation (11.0) (11.0) -- (11.0) (60.0) (60.0) -- (60.0) Total adjustments 1, (476.3) (39.3) (6.0) S&P Global Ratings' adjusted amounts Debt Equity EBITDA EBIT Interest expense Funds from operations Cash flow from operations Capital expenditures Adjusted 10, , , , , , ,410.0 PP&E--Plant, property, and equipment. OCF--Operating cash flow. Related Criteria And Research Related Criteria Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015 Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Key Credit Factors For The Telecommunications And Cable Industry, June 22, 2014 Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 Methodology: Industry Risk, Nov. 19, 2013 Corporate Methodology, Nov. 19, 2013 Group Rating Methodology, Nov. 19, 2013 Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Use Of CreditWatch And Outlooks, Sept. 14, Corporate Criteria: Rating Each Issue, April 15, MAY 18,

12 Business And Financial Risk Matrix Financial Risk Profile Business Risk Profile Minimal Modest Intermediate Significant Aggressive Highly leveraged Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+ Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+ Fair bbb/bbb- bbb- bb+ bb bb- b Weak bb+ bb+ bb bb- b+ b/b- Vulnerable bb- bb- bb-/b+ b+ b b- Ratings Detail (As Of May 18, 2017) Swisscom AG Corporate Credit Rating Senior Unsecured Corporate Credit Ratings History 30-Jun Mar-2007 A/Stable/-- A A/Stable/-- A-/Stable/-- *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings credit ratings on the global scale are comparable across countries. S&P Global Ratings credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@spglobal.com MAY 18,

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