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Moodyʼs downgrades outlook on Digi ratings

Ratings

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Moodyʼs Investors Service has changed its outlook from positive to stable on Digi Communications N.V. (Digi or DCS), the parent company of RCS & RDS S.A., a pay-TV and communications services provider in Romania and Hungary.

Moodyʼs decision to change DCSʼs ratings outlook from positive to stable reflects the increase in leverage at DCS due to the recent debt-financed acquisition of Invitel Távközlési Zrt. for EUR 135.4 million, says a press release sent to the Budapest Business Journal.

Further reasons for the rating outlook change were the expectation of negative or marginally positive free cash flow generation in 2018 and the lack of a publicly defined medium-term financial policy leverage ratio target, as well as prolonged uncertainty associated with the resolution of bribery and money-laundering accusations facing DCS and some of its senior management representatives in Romania, the press release notes.

"While DCSʼs leverage remains close to the boundaries defined for a ratings upgrade, the deleveraging process will be slower than originally expected due to Invitel Távközlési Zrt.ʼs debt-financed acquisition, and so far there has been no evidence of positive free cash flow generation due to continued high capex," said Gunjan Dixit, Moodyʼs Vice President - Senior Credit Officer and lead analyst for DCS. "The stable outlook on the rating reflects that DCS is well positioned in the rating category, with some headroom for deviation in the event of operating underperformance," added Dixit.

Over the past years, Digi has been growing its revenues strongly in the high single digits, notes the press release. However, it adds, Moodyʼs expects Digiʼs organic revenue growth rate to decrease to around 3-4% in future years driven by market maturity, although the Invitel acquisition will continue to support high single-digit reported revenue growth in 2018/19.

In the first quarter of 2018, Digi has seen year-on-year reduced revenue growth of 2.7%, driven by the impact of much lower revenues from handsets as a consequence of the change made by Digi in its commercial offering of handsets from the end of Q1 2017.

The companyʼs adjusted EBITDA margin in Q1 2018 has nevertheless seen a year-on-year improvement (33.3% vs. 28.7%), mainly due to the mobile business profitability catch-up and the almost neutral impact of energy activity in the current period in Romania.

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