Irish telecoms operator ERC Ireland Holdings Ltd. has recently confirmed a breach of the leverage covenant under its senior facility agreement on June 30, 2011, along with a temporary waiver until Dec. 15, 2011.
-- In our view, there is a clear risk of a capital restructuring over the next few months--which would be tantamount to a default under our criteria--as possible remedies could aim to address the long-term sustainability of the capital structure.
-- We are therefore lowering our long--term corporate credit ratings on ERC Ireland Holdings and related companies to 'CC' from 'CCC+'.
-- The negative outlook reflects the possibility of a downgrade to 'D' (default) or 'SD' (selective default) if the group announces an exchange offer or debt restructuring that qualify as default under our criteria.
Standard & Poor's Ratings Services said today that it lowered to 'CC' from 'CCC+' its long-term corporate credit ratings on ERC Ireland Preferred Equity Ltd. (ERCIPE), ERC Ireland Finance Ltd. (ERCIF), and ERC Ireland Holdings Ltd. (ERCIH), together, the eircom group. These entities are the parent companies of leading Ireland-based telecommunications provider eircom Group Ltd. (not rated). The outlook is negative.
The downgrades follow the eircom group's recent confirmation of a breach of the leverage covenant under its senior facility agreement on June 30, 2011. The group obtained a temporary waiver until Dec. 15, 2011. However, in our view, the eircom group is likely to breach this covenant again in December 2011, after the expiry of the temporary waiver and absent any remedial measures. In addition, we believe that the eircom group's capital structure may not be sustainable over the long term. This is due to the combination of the eircom group's financial risk profile--which we assess as highly leveraged--and extremely challenging market conditions in Ireland, including stiff competition and a depressed economy. In our opinion, management could try to address the long-term sustainability of the capital structure. We therefore believe that management could decide both to alleviate the risk of breaching the covenant again and to reorganize, in a credit-dilutive manner, the capital structure at the same time.
We do not rule out the possibility that management could alleviate covenant pressure for a number of quarters including and beyond December 2011 without implementing credit-dilutive restructuring measures. However, we see this possibility as less likely, especially as the recent temporary waiver was granted to provide the eircom group with the stability to develop a permanent solution to the sustainability of its balance sheet.
Management anticipates that there will be a significant reduction in total EBITDA in the first quarter of 2012 (ended Sept. 30, 2011) compared with the same period the previous year, although there are no precise figures available at this stage. In our opinion, revenues and EBITDA will likely remain under pressure in the next few quarters, but with further efforts to cut costs likely to soften the effect of lower sales.
In our opinion, the eircom group's capital structure is likely to become unsustainable, especially in light of the currently adverse trading environment in Ireland. We think that the upcoming expiry of the recent temporary waiver of the covenant breach increases the possibility that the group might undertake debt restructuring measures that would be tantamount to a default under our criteria.
Given our view of the pressure on the eircom group's revenues and profits in 2012, and management's aim to address the long-term sustainability of the capital structure, we are unlikely to revise the outlook to stable over the next few months.
RELATED CRITERIA AND RESEARCH
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers' Speculative-Grade Debt, Aug. 10, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009
-- How Standard & Poor's Uses Its 'CCC' Rating, Dec. 12, 2008 -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008