OREANDA-NEWS. Fitch Ratings has affirmed Germany-based sub-metering company Techem GmbH's (Techem) Long-term Issuer Default Rating (IDR) at 'BB-'. The Outlook is Stable.

Fitch has also affirmed Techem's EUR815m senior secured bank debt and EUR410m senior secured notes at 'BB'. The EUR325m subordinated notes issued by Techem Energy Metering Service GmbH & Co. KG are also affirmed at 'B'.

The affirmation reflects Fitch's view that Techem has good earnings visibility and growth prospects. The agency considers that management can steer the financial profile within the ratio guidelines for the 'BB-' Long-term IDR, balancing growth capex and dividend payments when required. Management and shareholders have given a firm commitment to maintain net debt/EBITDA based leverage at or below 4.5x at financial year-end. Fitch's rating case assumes adherence to this financial policy.

KEY RATING DRIVERS
Legislation Supports Growth
Techem is benefiting from the introduction of mandatory water testing and smoke detector installation in Germany, which will temporarily lead to materially higher investment activity. Over the medium term, EU directives require the implementation of energy efficiency guidelines into national legislation, but many countries have made little progress in terms of demand side measures. Techem is among the key players in this market, has operations across Europe and will be able to capitalise on its expertise as and when the roll-out wave happens.

Focus on Operational Efficiency
Fitch expects margin improvements over time from operational initiatives. One major project is the insourcing of sales partners' business volumes. Other measures relate to standardisation and streamlining of business processes from order placement through installation, service and maintenance.

Resilient Business Model
Techem benefits from a high degree of stability and predictability of cash flows due to the contracted nature of i) the installed base of metering devices; and ii) energy contracting. The group has a strong brand, a competitive cost base and renders a comparably high level of service. As a result, Techem reports low churn rates. Around 80% of revenues and profits come from Germany and future growth will enhance economies of scale.

Clear Financial Policy
The ratings are supported by a firm commitment from Techem's management and shareholders to maintain net debt/EBITDA-based leverage at or below 4.5x at financial year-end on a sustained basis (leverage may be above 4.5x at quarter ends due to the cash/working capital cycle across the year). Assuming the group does not hold excessive cash on the balance sheet (under our Fitch base case this means not more than EUR175m), this should ensure that gearing remains below 6.0x FFO adjusted leverage, as calculated by Fitch.

Credit Metrics Within Ratio Guidance
Fitch expects FFO adjusted gross leverage to rise from 4.8x after a strong performance in FY15 to 5.9x as the issuer draws on the new committed capex facilities over time, gradually reducing to below 5.5x by FY19. This development will be driven by a pick-up in capex to around EUR140m and a higher level of dividends at around EUR80-90m per year. FFO interest coverage is estimated to stay solid for the rating at or above 3.0x, supported by refinancing activity at better rates.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Techem include:
- Revenue growth of 5%
- EBITDA margins gradually improving from 33.9% in FY16 to 35.5% by end of FY19 driven by scale efficiencies and operational improvements
- Capex on average at EUR 140m per year reflecting revised investment strategy
- Shareholder dividends of EUR80-90 p.a., maintaining net debt / EBITDA at or below 4.5x at financial year-end.

RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to positive rating action include:
- Further improvement in operating profitability through organic business growth,
- Debt prepayment that reduces FFO adjusted leverage to below 4.5x on a sustained basis, together with FFO interest coverage greater than 3.0x.

Future developments that may, individually or collectively, lead to negative rating action include:
- FFO adjusted leverage at or above 6.0x or FFO interest coverage below 2.0x over a sustained period,
- sustained reduction in revenues and margin erosion to below 30% (FY15: 33.7%), leading to persistently negative free cash flows (FCF)

LIQUIDITY
Following the refinancing the business has ample liquidity, including EUR210m of committed capex facilities, EUR35m of available committed revolving credit facilities, cash and cash equivalents of more than EUR100m at the next year-end as estimated by Fitch and positive free cash flow before dividends. The next maturity relates to the EUR410m of senior secured notes in October 2019. Given that this is a sizeable portion of the overall debt, we would expect management to explore options for refinancing well in advance.