After the downgrade for Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) and the negative outlook for the debt rating of Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR), today it was the turn of the Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ) group for an across-the-board rating downgrade. Rating agency S&P Maalot has cut its ratings for Bezeq, mobile carrier Pelephone, and satellite broadcasting company DBS (trading as Yes), from ilAA to ilAA-. The rating outlook remains negative, reflecting S&P Maalot's expectation of further erosion of the company's business profile over the next twelve months, "in view of the challenges faced by Bezeq in particular and the telecommunications market in general, with all its sub-sectors," which S&P Maalot sees leading to further erosion of Bezeq's operating performance.
S&P Maalot's current rating action represents further confirmation that mobile telephony has become a risky sector in its view. After the recent rating actions in the competing companies, S&P Maalot had no option but to cut Bezeq's rating as well.
An ilAA- rating means that the debtor's ability to meet its financial obligations is high in relation to other Israeli debtors. For the sake of comparison, Cellcom has a rating of ilA, and Partner ilA+.
The main considerations behind the rating downgrade are S&P Maalot's estimate that Bezeq's business profile has been eroded by the intense competition in its areas of activity. The agency sees this level of competition continuing in 2019-2020 and believes that it is liable to lead to a decline in revenue, profits, and cash flow. "We see the expected write-down of the value of Pelephone leading to a reduction in Bezeq's shareholders' equity," the S&P Maalot analysts write, and recall that this write-down is in addition to a write-down of NIS 1.6 billion that Bezeq made in the value of Yes. "In our view, the write-downs tend to point to a future decline in the subsidiaries' cash flow in the long term, and weakness in the company's business profile. We assume that there may be further write-downs of the subsidiaries," they add.
S&P Maalot sees no dividends at all from Bezeq in 2019-2020, and believes that the regulatory obligation to maintain structural separation in the Bezeq group will not be cancelled, so that the tax asset in Yes will not be utilized. S&P Maalot also sees a 4-8% decline in Bezeq's revenue in 2019 because of weakness in all business segments: fixed-line, mobile, and multi-channel television. Although slight growth is expected in Pelephone's subscriber base, continuing aggressive competition will mean lower revenue per user in the next two years, alongside a fall in revenue from sales of end-user equipment.
In television, S&P Maalot sees the trend of premium subscribers switching to cheaper Internet (OTT) services offered by Cellcom, Partner and HOT Telecommunication Systems Ltd. (TASE: HOT), but says that Yes's Sting TV service will slightly offset the effect.
"We would point out that, since the beginning of 2019, the company has taken steps to extend the duration of its debt and has made early repayment of short-term debt, alongside the issue of long-term debt," the rating agency writes. "At the same time, the company has taken action on reducing expenses, and has consolidated its subsidiaries Bezeq International, Pelephone, and Yes, under a single management. In addition, the company is carrying out streamlining measures in all group units through early retirement by employees, which raises expenditure in the short term but which will mean greater financial flexibility in the medium to long term." S&P Maalot estimates that in the next two years Bezeq will present an adjusted debt to EBITDA ratio of 3.0-3.7, which is in line with its current rating.
Last week, rating agency Midroog published a response to Bezeq's announcement of a write-down of the value of Pelephone, but did not cut its rating for Bezeq's debt, which remains at Aa2.il Negative. Midroog wrote that the write-down would have a small cash-flow impact on Bezeq in the short term, but that it indicated that stabilization of competition in the mobile sector was further off.
Published by Globes, Israel business news - en.globes.co.il - on August 12, 2019
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