Moody's Investors Service has changed the outlook on the ratings of Magyar Telecom to negative from stable.
The change in the rating outlook reflects challenges associated with a weak economic environment in Hungary and, as a consequence, a continued pressure on the company's revenue as well as limited covenant headroom under the newly arranged senior secured facility. In Q3 2008, revenue declined by 6% in Hungarian forint (HUF) year-on-year. At the same time, revenue growth from the Internet services has slowed; e.g. revenue from Mass Market Internet grew by 2% in Q3 2008 versus Q3 2007. Although Moody's notes that the company was able to grow its EBITDA and EBITDA margin year-on-year, the rating agency is concerned about the company's future operating and financial trends, particularly in light of challenging economic conditions.
Furthermore, the company has limited covenant headroom under its newly negotiated bank facility. The company has a significant exposure to foreign exchange risk as the majority of its debt is denominated in euros whilst the majority of its revenue (approximately 75%) is generated in forints. The company recently completed refinancing of its senior secured and €100 million bridge facilities. Moody's notes that the company has limited headroom under some of its covenants under the new facility on the back of a weak exchange rate and potential of further depreciation of the Hungarian forint against euro. Although at this stage Moody's believes that there is a relatively low probability of the company breaching its covenants, the limited covenant headroom does increase financial risk. Moody's will monitor the company's compliance with the covenants and the headroom. In the event headroom should diminish further, downward pressure on the rating is likely.
Furthermore, Moody's notes that there are still some uncertainties regarding the company's shareholding structure in the near to medium term. Magyar Telekom terminated its strategic review initiated in 2008. However, Moody's believes that the company remains a non-core asset of its majority shareholder, TDC A/S, which is likely to seek to sell the company when the opportunity arises. (press release)