OREANDA-NEWS. S&P Global Ratings revised its outlook to positive from stable on Romanian telecommunications and pay-TV operator, RCS & RDS S. A., and its parent Cable Communications Systems N. V. (CCS). At the same time, we affirmed our 'B+' long-term corporate credit ratings on both entities and on the existing notes.

We have also assigned our 'B+' issue rating to the proposed senior secured notes to be issued by CCS and guaranteed by RCS & RDS.

The outlook revision reflects our expectation of the group's materially reduced currency risk after the proposed refinancing, and our expectation that CCS' credit ratios will strengthen in line with its solid operating performance. CCS plans to issue €375 million in senior secured notes and Romanian leu (RON) 1.43 billion (€317 million) in senior secured loans to refinance existing debt of €659 million. As a result, the amount of debt will be unchanged, but we expect that euro-denominated debt will reduce to about 40% of total debt, compared with 65% currently. Given that most revenues are generated in leu and Hungarian forint, the currency mismatch will partly remain but be much lower.

At the same time, we expect that RCS & RDS' operating performance will stay solid, and therefore project stronger EBITDA margins in the coming years. Our revised estimates are supported by the Romanian mobile operations' solid and quicker-than-expected achievement of positive EBITDA in 2016. This stemmed from a stronger market share of mobile subscribers from about 6% in 2014 to about 11% in June 2016 and solid growth of the average revenue per user (ARPU), partly due to its strong position in post-paid services (RCS & RDS' post-paid market share is 23%).

In the quarter ended June 30, 2016, the mobile EBITDA margin in Romania turned positive after the operations achieved sufficient scale, compared with negative in previous years. Although we do not expect the adjusted consolidated EBITDA margin to return to the 2014 levels (pre-mobile entry) of about 35%, we have revised upward our adjusted EBITDA forecast for 2016 and 2017 to just below 30%, compared with 27% in 2015. CCS' operations have also been solid in the fixed-line segment in Romania and Hungary, primarily due to strong subscriber growth of about 5%-7% in Romania and 10%-13% in Hungary over the past year. However, the price pressure in this segment persists, leaving the ARPU unchanged over the past year.

Our assessment of CCS' business risk profile is constrained by the group's exposure to Eastern European markets, its relatively small scale, and intense competition from large players. Nearly 90% of CCS' revenues are generated in Romania and Hungary, two small economies with volatile currencies that could affect its financial performance. Furthermore, CCS faces intense competition from competitors that are part of large international operators with stronger financial flexibility. However, CCS has managed to increase its market share of mobile subscribers in Romania to 11%, still far behind the market leaders Orange (36%) and Vodafone (22%).

These weaknesses are partly offset by the company's solid market shares in its main segments, its state-of-the-art network, and degree of diversification. The company is internationally diversified, operating as a mobile virtual network provider in Spain and Italy. CCS is also diversified in terms of products and technologies, offering cable and satellite TV, fixed telephony, and Internet in Romania and Hungary. In Romania, it offers mobile voice and data services and, in Hungary, it is a reseller of mobile broadband.

We forecast that the company's adjusted EBITDA margin will be just below 30% in the coming years, a level we think is aligned with peers', given CCS' diverse product offering. Our adjusted EBITDA figure excludes the amortization of content rights because we view these rights expenditures as recurring operating expenses. CCS acquires content rights that it capitalizes and subsequently amortizes. We have not included in our base case any entry into the mobile market in Hungary, even though the company has acquired spectrum over the past two years, most recently in May 2016. However, we think a launch of mobile operations in Hungary would initially dilute profitability and have a negative impact on cash flow, at least in the near term, as it did in Romania.

Our assessment of CCS' financial risk profile remains constrained by the company's modest free operating cash flow (FOCF) generation. However, we expect that increasing EBITDA and, to a lesser extent, lower interest costs will offset the company's still high capital expenditures (capex); as a result, we expect FOCF will increase over the coming years.

These weaknesses are partly offset by CCS' lower leverage than that of most European cable players and its robust interest coverage ratios, which we expect will improve further to about 4.9x by year-end 2016, given lower interest rates on proposed debt.

The positive outlook on CCS reflects the possibility of a one-notch upgrade in the next 12 months if credit ratios continue to strengthen while the refinancing takes place in line with our assumptions.

We could raise the rating if FOCF to debt improves to about 5% and FFO to debt to between 25% and 30%, while leverage stays between 3.0x and 3.5x and the proportion of euro-denominated debt declines to about 40%.

We could revise the outlook to stable if FOCF to debt is not sustainably above 5% over time. This could be caused by higher-than-expected capex. Although unlikely, we could also revise the outlook to stable if CCS' revenues or EBITDA did not grow as we expect, if leverage exceeded 3.5x, or if liquidity weakened.