Fitch Ratings has affirmed Tivana France Holdings SAS's (TDF) Long-Term Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook.

A full list of rating actions is detailed below.

TDF's ratings reflect the group's high predictability of revenues and cash flows, driven by the mission-critical nature of its passive tower infrastructure services for both TV/radio broadcasters and telecoms operators. High EBITDA margins, low maintenance capex and moderate growth lead to sustainable positive pre-dividend free cash flow (FCF) generation.

The Stable Outlook reflects our expectation that TDF will manage its leverage within our defined sensitivities, consistent with its intention to maintain an investment-grade rating.

Key Rating Drivers

Stable Leverage: We expect TDF to manage its leverage closer to the upper end of its threshold for 'BBB-' rating, ie. at or slightly below 5.5x Fitch-defined EBITDA net leverage. TDF is likely to distribute its entire FCF to its shareholders and, possibly, even in higher amounts funded by additional debt that is proportionate to EBITDA growth to keep leverage stable. In July 2023 the company issued a EUR600 million bond with maturity in July 2028 that provides sufficient funding for additional shareholder distributions above FCF in 2023 and, potentially, in 2024.

Manageable Interest-Rate Exposure: We view TDF's exposure to high interest rates as manageable as the majority of its debt is fixed-rate. However, its effective interest rate is likely to gradually increase, as the company utilises its additional EUR175 million capex facility and, potentially, a revolving credit facility (RCF) that are both floating-rate. Coupon on its last EUR600 million bond issued in July 2023 is also significantly higher than its legacy instruments' and will add to higher interest payments.

Interest payment is likely to increase with refinancing or new debt issuance in the medium term in a high interest-rate environment. Overall, we expect interest to consume 16%-21% of EBITDA in 2024-2026, moderately weighing on cash flow.

Mid-Size Telco Towers Market Share: TDF estimated its market share of French mobile network operators' points-of-presence at 14% in 2022, which makes it only a mid-sized tower company, and exposes it to a higher risk of tower loss due to the telecoms industry consolidation or tower portfolio optimisation by its current customers.

Telecoms Towers Keep Growing: We expect telecoms site-hosting to continue growing, supported by new tower construction but also higher co-location as French telecoms operators deploy their 5G networks and improve 4G service under France's New Deal initiative. However, TDF has lower visibility than some of its larger peers over its future growth in the lack of a long-term committed build-to-suit (BTS) programme.

TDF managed to add 250 new sites in 2022. For comparison, Cellnex, the largest tower operator in France, had a gross BTS pipeline of above 7,300 towers (as of end-3Q23) to 2030, suggesting close to 1,000 new towers per year on average over this period.

Improving Telecoms Contribution: We view positively that the majority of TDF's site-hosting revenue is derived from telecoms tenants, a segment that we deem more stable than broadcasting. Passive mobile telecoms infrastructure faces minimal risk of technological obsolescence, with both low churn and renewal risk as customers face potential service disruption or prolonged deterioration in coverage from changing their tower provider. Telecom site-hosting revenues accounted for 62% of TDF's non-fiber infrastructure services in 2022, and we expect this share to continue growing.

Leadership in Declining Broadcast Market: TDF has leading market positions in TV and radio broadcasting, a segment that is facing significant medium-to-longer term threat of technological substitution by new distribution platforms such as IPTV and internet radio. We believe broadcasting of the larger TV and radio channels is likely to continue as it is the best fit for covering large territories in a cost-efficient manner and serving more rural areas. Any debate over the future of direct-to-home free-to-air broadcasting is unlikely to lead to changes before 2030.

However, broadcasting volume and pricing are likely to remain under pressure, particularly when TV multiplex contracts are renegotiated. TDF's broadcasting revenues declined 2.6% yoy in 1H23.

Strong Revenue Backlog: TDF's strong revenue backlog improves its revenue visibility and helps to sustain profitability by reducing the risk of low tower occupancy. TDF reported its revenue backlog at EUR4,126 million at end-June 2023, equal to more than five years of its annual revenue, compared with four at end-2017. After renewals in 2020-2021, contracts with France's four mobile network operators expire in 2031 at the earliest, and some contracts may be extended for another five years.

Robust Cash Generation: TDF benefits from high EBITDA margins of over 50% and low maintenance capex (6.3% of revenue in 2022), which drives its strong intrinsic cash flow generation. Expansion tower capex is typically undertaken under BTS arrangements that provide healthy revenue visibility under committed occupancy.

Fiber Ring-Fenced: Our analysis deconsolidates ring-fenced fibre operations from TDF's scope of operations as we assess parent-subsidiary linkage as weak, with a resultant positive impact on TDF's leverage. Linkage may become stronger, potentially leading us to reconsider the deconsolidation approach if the fibre network starts generating a significant contribution to TDF's EBITDA or broadband operations become a core growth engine for TDF. Fibre operations are currently small, accounting for only 10% of TDF's reported EBITDA after leases in 1H23.

Derivation Summary

TDF is a single-country mid-sized operator, unlike its significantly larger and more diversified pan-European peer Cellnex Telecom S.A. (Cellnex; BBB-/Stable) or single-country Infrastrutture Wireless Italiane S.p.A. (Inwit; BBB-/Stable), which hold stronger positions in their respective markets.

Inwit benefits from strong anchor relationships with two leading mobile operators in Italy. As an incumbent broadcast tower company, TDF derives a significantly higher share of its revenue from stagnant TV and radio broadcast segments than all of the above peers.

TDF's lower exposure to more stable telecoms site-hosting revenue and weaker market positions lead to tighter leverage thresholds for its rating versus larger peers'. However, its credit profile benefits from lower leverage than Inwit and Cellnex.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

High single-digit revenue growth in the telecoms segment supported by expansion capex in 2023-2026

Low single-digit decline of TV broadcasting revenue in 2023-2026, with marginally more resilient radio broadcasting revenue

Capex stabilising at 30% of revenues as TDF intends to maintain the current high rate of new towers construction

EBITDA margin of core (ie excluding broadband and related) operations at around 55%-56% in 2023-2026

All FCF paid out as shareholder distributions, and possibly in high amounts funded by additional debt that is proportionate to EBITDA growth to keep leverage stable

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

EBITDA net leverage sustained below 5.0x

Significantly higher contribution of long-contracted telecoms site-hosting to total revenue

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

EBITDA net leverage sustained above 5.5x

Deterioration in FCF generation or a change in revenue or EBITDA mix with a greater contribution to FCF from higher-risk assets and less predictable revenue streams

An increase in churn or pricing pressures resulting from contract renewals on less favourable terms

Liquidity and Debt Structure

Adequate Liquidity: We view TDF's liquidity position as satisfactory. At end-1H23, TDF had EUR49 million of cash (at principal operating subsidiary TDF Infrastructure SAS). This was complemented by EUR325 million available under an untapped revolving credit facility with maturity in 2028 and EUR175 million under a capex facility.

After issuing a five-year EUR600 million bond and redeeming EUR150 million of outstanding debt in July 2023, the company's other two bonds with EUR650 million and EUR800 million face value have maturities in April 2026 and December 2029, respectively.

ESG CONSIDERATIONS

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

Issuer Profile

TDF is the incumbent tower company in France with a portfolio of 7,446 active towers and 745 active rooftop sites, with an additional above 11,000 towers and rooftops available for marketing at end-2022. In February 2022, the company ring-fenced its broadband operations in four French regions into a dedicated entity and put in place project finance funding, with no recourse to TDF.

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