Fitch Ratings has affirmed Iliad SA's (Iliad) Long-Term Issuer Default Rating (IDR) and its senior unsecured instrument rating at 'BB'.
The Recovery Rating on the senior unsecured debt is 'RR4'. Fitch has also affirmed Iliad Holding S.A.S.'s Long-Term IDR at 'BB' and senior secured instrument rating at 'BB-'/'RR5'. The Outlook on both IDRs is Stable.
The ratings of Iliad Holding and Iliad are based on a consolidated rating profile and reflect Iliad Holding's 97% ownership of Iliad. Iliad is an integrated telecom operator with presence in France, Poland and Italy. However, the company's operating profile is anchored around its French operations, which contributed almost 70% to its EBITDAaL (EBITDA after leases) and operating free cash flow (EBITAaL less capex including spectrum) in 2023. Iliad has a solid position in the French telecoms market based on the deployment of its own mobile and fixed network and partnerships with passive infrastructure providers. Iliad is also a key integrated operator of the Polish telecom market though Play and UPC acquisition and has presence in Italy with a 13.6% market share in mobile.
The Stable Outlook reflects our expectation that EBITDA net leverage at Iliad Holding will remain within its sensitivities and trend towards the upgrade threshold by end-2026. Network investments are expected to keep free cash flow (FCF) generation negative over the next two years; however, these expected to turn positive from 2026.
Key Rating Drivers
Strong Market Positions: Iliad has a solid position in its home market, being number two in fixed broadband and a strong number four in mobile, with 23% and 18% subscriber market shares at end-2023 respectively. Its technology and pricing innovation, coupled with an industry-leading cost structure, have enabled it to build a well-entrenched position in fixed broadband with strong cash generation. This is underscored by Iliad's domestic EBITDAaL margin of around 40% and operating FCF margin of around 14% in 2023.
In Poland Iliad enjoys leadership in mobile and it is the second largest operator in fixed broadband. Acquisition of the Polish mobile operator Play in 2020 and cable operator UPC Poland in 2022 have enabled Iliad to create an integrated, fixed and mobile operator in Poland.
Healthy Operating Performance: Iliad demonstrated sound operating results with revenue rising 8.2% in 2023 on a like-for-like basis and EBITDAaL by 2.1%. Revenue was supported by strong growth in the number of subscribers and increase in average revenue per user. Organic revenue grew 8.7% in France, 4% in Poland and 14.5% in Italy. The EBITDAaL margin decline was driven by higher energy costs and lease expenses in Poland as a result of a 50% sale of its fiber optic infrastructure. We forecast revenue to grow around 5%-7% in 2024-2027 with Fitch-defined EBITDA margin at around 33% (34.7% in 2023).
Increased Leverage Capacity: We have relaxed EBITDA net leverage sensitivities by 0.2x to 3.7x for the upgrade and by 0.3x to 4.3x for the downgrade. This reflects a reduction in FCF risk as a result of improved scale in Italy and growth in other parts of the group. Since entering the Italian mobile market in 2018, Iliad Italy is now EBITDA-positive and generated positive company-defined operating FCF for the first time in 2023, which is expected to further improve in the next two to three years. Iliad has increased its overall scale, with revenue and Fitch-defined EBITDA forecast at EUR9.9 billion and EUR3.3 billion in 2024, up from EUR5.9 billion and EUR1.8 billion in 2020, respectively.
EBITDA Leverage Within Thresholds: Iliad Holding's EBITDA net leverage declined to 4.2x at end-2023, from its peak of 4.7x at end-2022 following the acquisition of UPC Poland and hefty one-off spectrum payments in Italy. We expect leverage to remain broadly stable in 2024, despite the acquisition of a minority stake in Tele2. We however forecast Iliad Holding to deleverage to 4.0x in 2025 and to 3.7x in 2026, assuming no further M&A. Deleveraging will be supported by improved FCF generation, which we expect to become positive from 2026.
Investments Weigh on FCF Profile: The consolidated group's FCF has been consistently negative due to network investments, which we expect to continue in 2024-2025. In particular FCF has been weighed down by Iliad's investment in Italy, which is still at a fairly early investment stage and yet to build sufficient scale to become FCF-generative. As a result, CFO less capex /debt at Iliad Holding is negative at around 3% in 2023 but expected to gradually improve to around 6% in 2027.
Building Scale in Italy: Iliad has made good progress since entering the Italian market to reach 10.7 million mobile subscribers (13.6% market share) with around 1.2 million net subscriber additions at end-2023. Revenues in Italy grew to EUR1.1 billion in 2023 from EUR674 million in 2020 while EBITDAaL margin increased to 23.3% from a negative 19.7%. Margin improvement was enabled by the deployment of its own network and converting variable costs into fixed costs while reducing national roaming costs.
Our ratings case envisages Fitch-defined operating FCF in Italy to remain negative in 2024-2025 and to turn positive in 2026 on continued growth in revenues and EBITDAaL margins and accompanied by a decline in capex intensity.
Consolidated Rating Approach: Fitch sees a strong linkage between Iliad Holding and its stronger subsidiary Iliad based on its Parent-Subsidiary Linkage (PSL) Criteria. Iliad Holding's ownership and control of Iliad lead to 'open' access and control while covenant restrictions in bank loan indentures are not strong enough on their own to establish effective ringfencing, in our view. Iliad's Standalone Credit Profile (SCP) is one notch higher than the consolidated rating profile at 'bb+', due to lower leverage at the operating subsidiary.
Structural Subordination of Debt: Fitch-defined consolidated gross debt was EUR14.9 billion at end-2023, of which EUR11.4 billion was issued by Iliad and the remainder by Iliad Holding. The quantum of gross debt issued by Iliad leads to structural subordination of the debt issued by the holding company. As result, the debt issued by Iliad Holding is rated one notch lower than its IDR.
Derivation Summary
Iliad Holding and Iliad are rated on a consolidated basis, with Iliad driving the operating profile of both companies. Iliad's operating profiles in France and Poland are broadly in line with that of other alternative telecoms operators with well-entrenched domestic positions and ownership of both fixed- and-mobile network assets, such as The Sunrise Holding Group (BB-/Negative), Telenet Group Holding N.V (BB-/Stable) and VMED O2 UK Limited (BB-/Negative), although Iliad owns only 50% of its fixed network in Poland. Iliad Holding's and Iliad's higher IDRs reflect their lower leverage. The loosening of the EBITDA net leverage sensitivities for Iliad Holding and Iliad has also brought them in line with those of UPC, Telenet and VMED.
We rate Iliad Holding and Iliad on a par with Lorca Holdco Limited (BB/Positive), although Iliad's revised sensitivities are slightly tighter than for Lorca. This reflects Lorca's stronger market position following the merger between MasMovil and Orange Spain (with above a 40% consolidated market share in Spain both in fixed broadband and mobile) and full ownership of its fixed and mobile infrastructure.
Iliad's operating profile is weaker then domestically focused incumbent operators', such as Royal KPN N.V. (BBB/Stable). The stronger operating profile of incumbent operators like Royal KPN reflects their higher service revenue market share in both mobile and fixed, network infrastructure ownership, network scale economics of servicing of all market segments and a market structure that is predominantly based on two to three duplicate mobile or local loop network infrastructures.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for Iliad and Iliad Holding
Revenue to grow around 7% in 2024-2025, before slowing to around 5% in 2027
Fitch-defined EBITDA margin of around 33% in 2024-2027
Capex including spectrum at around 23% of revenue in 2024, gradually declining to 17% by 2027
Dividends paid by Iliad of EUR300 million per year and EUR30 million per year by Iliad Holding
Net acquisition spend of EUR500 million in 2024
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade for Iliad Holding and Iliad:
Sustained competitive position in France and Poland and improved scale in Italy underscored by significant positive FCF generation
A disciplined financial policy that sustains Iliad Holding's consolidated Fitch-defined EBITDA net leverage below 3.7x
Iliad Holding's consolidated CFO less capex consistently at or above 9.0% of gross debt
Iliad Holding's EBITDA (excluding Iliad, including interest earned from inter-company loans) above 2x gross interest
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade for Iliad Holding and Iliad:
Iliad Holding's consolidated Fitch-defined EBITDA net leverage above 4.3x on a sustained basis
CFO less capex consistently at or below 7.0% of gross debt
Iliad Holding's EBITDA (excluding Iliad, including interest earned from inter-company loans) below 1.5x gross interest
A significant erosion of Iliad's market share of mobile or fixed broadband in France and Poland and/or operating FCF
Delayed prospects of FCF turning positive in Italy
Liquidity and Debt Structure
Comfortable Liquidity: Iliad has comfortable liquidity, with cash and cash equivalents of EUR1.2 billion at end-2023 and undrawn revolving credit facilities (RCF) of EUR2 billion available until July 2028. In April 2024 Iliad completed a EUR500 million senior unsecured bond issue to repurchase its bonds maturing in October 2024 and April 2025. This provides sufficient capacity to cover expected negative FCF and EUR2.7 billion debt maturing in 2024-2025.
Iliad Holding had an undrawn EUR300 million RCF maturing in July 2026 and cash and cash equivalents of EUR330 million at end-2023. We expect Iliad Holding to receive about EUR300 million in dividends from Iliad in 2024. This comfortably covers annual interest payments and other company net outflows expected in 2024. As of end-2023 Iliad Holding had EUR2.1 billion of debt maturing in 2026 and EUR1.5 billion maturing in 2028. In April 2024 Iliad Holding completed a EUR1.3 billion senior secured bond issue to refinance its debt maturing in 2026.
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
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.
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