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Moody's assigns (P) Ba3 CFR to Cool Holding Ltd [EMBIN (Emerging Markets Business Information News]
[November 28, 2012]

Moody's assigns (P) Ba3 CFR to Cool Holding Ltd [EMBIN (Emerging Markets Business Information News]

(EMBIN (Emerging Markets Business Information News) Via Acquire Media NewsEdge) Moody's has today assigned a provisional corporate family rating (CFR) of (P)Ba3 and a provisional probability of default rating (PDR) of (P)Ba3 to Cool Holding Ltd. ("Cool"), an affiliate of Altice Financing S.A. and HOT Telecommunication Systems Ltd. Concurrently, Moody's has assigned a provisional (P)Ba2 rating to the proposed USD700 million equivalent senior secured notes due 2019 to be issued at Altice Financing S.A. and a provisional (P)B2 rating to the proposed USD390 million senior notes due 2020 to be issued at Altice Finco S.A. The outlook on the ratings is stable.

The CFR and PDR have been assigned on a provisional basis until successful completion of the proposed transaction whereby Cool is looking to acquire the outstanding 31% minority shareholding in Hot Telecommunication Systems (HOT or the company), bringing its holding in the Israeli cable operator to 100%. The rating on the new notes is provisional pending completion of this transaction as well as final and conclusive review by Moody's of the final documentation.

As such, the ratings have been assigned at Cool assuming full consolidation of the HOT operations and the new notes at that level.

RATINGS RATIONALE The (P) Ba3 CFR reflects (i) HOT's strong foothold in the Israeli pay TV market with a market share that has remained stable over the last four years at close to 60%; (ii) the company's advanced and up-to-date infrastructure network providing it with a competitive advantage; (iii) the modest adjusted leverage of around 3.9x at closing of the transaction supported by a strong and rapid deleveraging profile as Mobile's EBITDA breaks-even in 2013.

The rating is constrained by (i) the saturated nature of the TV and broadband markets in Israel where penetration rates are high and subscriber growth hence limited; (ii) the company's relatively small size relative to its direct competitor Bezeq or its global peers; (iii) continued substantial capex spending over the medium term to develop and improve its mobile network (iv) low visibility on future regulatory changes which could impact HOT's competitive advantage.

On 23 August 2012, Cool made an offer to purchase in cash the remaining 31% shares in HOT (expected cost around NIS945 million or USD241 million) as part of this process, Cool will also be required to refinance its outstanding net debt (c. NIS879 million USD224 million) and HOT's outstanding secured bank debt (c. NIS1.9 billion or USD 485 million) will also be repaid.

To do so, a senior secured bond of USD700 million equivalent and a senior unsecured bond of USD390 million will be issued at the Altice Financing S.A. and Altice Finco S.A. levels respectively before being on-lent to Cool and HOT at closing of the acquisition of the shares.

HOT is an Israeli group of communications companies that offers pay TV, broadband internet, fixed telephony and, since November 2011, cellular services. The company is the only company to offer triple play services and benefits from a leading position in Pay TV (c.61% market share) and second position in broadband internet (c.40%) and fixed line telephony (c.20%).

The Israeli cable market is shared between HOT and incumbent Bezeq whose Pay TV offering relies on DTH. We believe HOT's position in this concentrated market is protected by the barriers to entry imposed by the high upfront costs a third infrastructure network owner would have to disburse, the long dated nature of building a wide-coverage network against the relatively small size of the addressable population.

On the other hand, with pay TV penetration in Israel of around c. 68%, the outlook for growth in the cable segment remains constrained and reliant on up-selling current services and pushing multi-play subscriptions onto the existing subscriber base bringing in marginal ARPU improvements and RGU increases in the future. In the context of a structurally declining subscriber base (albeit at a slow pace) these efforts will only yield moderate growth and the company is hence looking at its mobile business to drive future growth.

In November 2011, HOT acquired MIRS a mobile operator with an iDEN network and subscriber base of around 4% of the total market. Since then, the company has invested heavily in upgrading its network to 3G and although subscribers have been growing, mobile EBITDA is still expected to be negative by year end 2012.

Moody's will continue to monitor the progress made in the mobile sector and expects this segment to generate positive EBITDA as soon as 2013. The current ratings hence take into account the expected deleveraging profile of the company.

HOT has an adequate liquidity profile with a USD80 million revolving credit facility expected to be undrawn at transaction closing and an overfunding balance of around c.USD86 million. In addition the company generates positive free cash flow and benefits from a long-dated maturity profile. Moody's notes that the coupon on the new notes will be reliant on HOT's ability to upstream dividends to the COOL level. While the amount of distributable reserves at HOT could limit the company's ability to pay out the appropriate amount of dividends, we take comfort in the amount of cash overfunding raised with the new notes at Altice Financing S.A.

The ratings on the two proposed bonds take into account the complex capital structure of the transaction, as well as the security granted to the senior secured bond which in effect is capped at ILS1.9bn. The rating on the senior secured bond also recognises the fact that it benefits from an indirect guarantee from the guarantor group. The instrument rating takes into account the existence of legacy amortising unsecured notes at HOT (c.NIS1.4billion at closing).

(c) 2012 EMBIN (Emerging Markets Business Information News) Provided by an company

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