Fitch has assigned a 'B'/'RR1' rating and Rating Watch Negative (RWN) to
In addition, Fitch has downgraded GTT's revolving facility and existing first-lien term loans of
Fitch has maintained the RWN on GTT's and GTTBV's 'CCC' Long-Term Issuer Default Ratings (IDRs), and GTT's 'CC'/'RR6' unsecured notes ratings.
The downgrade of the existing credit facility reflects weaker recovery prospects for these loans post GTT's assumption of the super senior priming term loan that has priority over the existing debt in the recovery waterfall, coupled with a lower going concern EBITDA in Fitch's recovery calculations vs. previous expectations, as a result of preliminary findings of the accounting review.
On
GTT has obtained multiple extensions to the notes and credit facility forbearance agreements since these were originally entered into in late October, as a result of non-filing of financial statements due to the ongoing accounting review. The second forbearance agreement entered into on
The company's inability to seek further extensions or waivers from its lenders, in the event the financial statements are not filed by the extended deadline, would result in an event of default under the loan documents and indenture. A negative rating action could occur should the company not receive waivers or amendments from its creditors by the deadline.
Fitch will resolve the RWN when the company completes its internal review of the accounting issue and/or files the financial statements by the extended deadline. The ratings will be downgraded to 'C' if there is an uncured event of default. Fitch's rating actions will be based on the review's final findings and the resultant effect on the company's EBITDA. The RWN will be removed once Fitch assesses the impact of the final findings from the accounting review on GTT's credit profile. A positive action will factor in the potential for debt reduction due to the asset sale and the company's progress in stabilizing revenues and EBITDA.
KEY RATING DRIVERS
Default Risk: Fitch believes there is a substantial risk of default in the coming few months due to GTT's heightened risk of not filing the delayed financials by the
Slowdown in Net installs: GTT's 1Q20 revenue, the last reported period, was negatively affected by moderately elevated churn and access restrictions beginning in March in
Leverage and Asset Sales: Fitch expects GTT's gross leverage to remain elevated over the forecast in the absence of consummation of material asset sales. In
Recurring Revenue and Contract Matching: Fitch expects the recurring nature of GTT's revenue to provide a significant amount of stability and visibility into future cash generation. More than 90% of the company's revenue is contractually recurring, with contracts generally ranging between one to three years. GTT will typically match the contract length of its last-mile leases with the customer's contract length in order to insulate itself from price fluctuations. Approximately 80% of the company's network costs are related to these last-mile leases, providing the company with a significant amount of capacity to downsize if customers choose not to renew.
Strong Secular Trends: GTT's credit profile benefits from the ongoing secular in the industry. Even pre-pandemic, the demand was driven by the rapid adoption of cloud-based applications and an increasing amount of data usage across locations as a result of increasing files sizes, voice, video conferencing and real-time collaboration tools. The coronavirus pandemic has further boosted the demand for internet connectivity products, as enterprises continue to increase their demand for networking bandwidth as millions work from home.
Competitive Position and Scale: Many of the company's competitors are significantly larger, better capitalized and have a stronger market presence. The company's capex-lite business model places it in an inherently inferior competitive position due to its dependence on third-party providers for fiber connectivity, which is primarily in the last-mile connection, where there are significantly less connectivity providers. Fitch believes this dependency is somewhat mitigated by the company's partial ownership of its core network.
Customer Diversification, Supplier Concentration: Fitch expects the company's credit profile to continue to benefit from broad customer diversification. Fitch estimates GTT's largest customer accounts for less than 5% of monthly recurring revenue (MRR), while its top-20 customers are expected to have made up less than 25% of MRR. These customers are multinational corporations with significant access to capital and liquidity. Fitch believes the majority of GTT's monthly recurring costs are tied to its top-20 suppliers. GTT's diverse base of over 3,500 suppliers partially mitigates risks stemming from the potential for increased margin pressure related to supplier pricing.
GTT has an ESG Relevance Score of '5' for Financial Transparency due to the delay in filing of 2Q20 and 3Q20 financials. Per 8-K filed on
DERIVATION SUMMARY
GTT's 'CCC' Long-Term IDR reflects a substantial risk of default in the near term as the company is currently in forbearance period, due to its inability to file 2Q20 and 3Q20 financials as a result of the ongoing accounting review. The company obtained an extension to forbearance period until
KEY ASSUMPTIONS
The assumptions listed below are based on the company's reported financials - 1Q20, the last reported period and prior years. These do not take into account the impact of ongoing accounting review on historical or current financials and/or increase in interest costs due to the assumption of the priming loan.
Revenue in 2020 is expected to decline near mid-single digits as a result of slowdown in net installs and a pause in the expansion of quota bearing sales reps, offset by slightly lower churn;
Full-year 2020 EBITDA margins to improve sequentially over 1Q20 levels as Fitch expects cost-cutting initiatives to offset some of the gross margin declines. Fitch expects gradual improvement in EBITDA margins to mid-20s over the forecast;
Capex intensity to remain within the 5%-6% range;
Fitch has not assumed asset sales or acquisitions in its current base case.
Recovery Assumptions:
The recovery analysis assumes that GTT would be reorganized as a going-concern in bankruptcy rather than liquidated.
We have assumed a 10% administrative claim.
Fitch estimates a distressed enterprise valuation of approx.
The 5.5x multiple is reflective of the company's capex-lite business model, partially offset by Hibernia and Interoute acquisitions. The multiple is also in line with the median for telecom companies published in Fitch's
The revolver is assumed to be fully drawn at the reduced commitment of
The super-priority loan is effectively senior to both US and EMEA first-lien term loans and the revolver.
Substantially all assets of the company (both
Fitch's recovery analysis assumes that asset sales have not happened or have fallen through, and therefore, includes the EBITDA generated from the assets that are part of the asset sale transaction and the entire debt in the company's current capital structure (including the loans that will be paid off using the asset sale proceeds). Fitch believes in the event the asset sale occurs as proposed, recovery on the remaining debt, after the super-priority loan and part of the first-lien debt is paid off, could be higher.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Resolution of the accounting issue and filing of financial statements by the extended deadline, and/or if the company is able to cure the default in the cure period or reach successful negotiations, eliminating potential risks of a default under the reporting requirement;
Gross leverage measured as total debt with equity credit/EBITDA, sustained at or below 5.5x; or FFO leverage sustained at or below 6.5x;
Expectation of positive FCF on a sustained basis;
Factors that could, individually or collectively, lead to negative rating action/downgrade:
An uncured default could result in a downgrade to 'C';
Liquidity issues, due to debt acceleration, failure to consummate the asset sale transaction or any other reason;
Significant restatements to Fitch-adjusted EBITDA, operating or credit profile resulting from the final findings of the ongoing review of the accounting issue could also affect the ratings negatively.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
LIQUIDITY AND DEBT STRUCTURE
Liquidity: The company's current liquidity position is not public due to the delay in the filing of 2Q20 and 3Q20 financials. As of
GTT entered into a new
The liquidity could become constrained if the debt under the credit agreement or indentures becomes immediately due and payable in the event GTT is unable to file delayed financials by the deadline, obtain further extensions to the current forbearance period, obtain a cure during the cure period or successfully negotiate remediations.
Asset Sales: On
The assets sale includes nonstrategic infrastructure assets that include pan-European fiber assets, subsea transatlantic fiber and data center infrastructure, acquired through the Interoute and Hibernia acquisitions. The proceeds from divestitures will be used for deleveraging. Given the company's high leverage of over 8x, the asset sales are imperative to optimize the overall capital structure and pre-empt further stress on the capital structure and ratings, should leverage continue to increase without a sale.
Update to Capital Structure: In
As previously stated, the company secured a
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
GTT has an Environmental, Social and Governance (ESG) Relevance Score of '5' for Financial Transparency due to the ongoing issue of accounting review and delay in filing of financial statements that has led to a substantial risk of default, an event that may occur if not cured by the extended
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONS
ENTITY/DEBT RATING RECOVERY PRIOR
GTT Communications BV LT IDR CCC Rating Watch Maintained CCC
senior secured
LT CCC Downgrade RR4 CCC+
super senior
LTB Ne w Rating RR1
GTT Communications, Inc. LT IDR CCC Rating Watch Maintained CCC
senior unsecured
LT CC Rating Watch Maintained RR6 CC
senior secured
LT CCC Downgrade RR4 CCC+
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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