Altice Europe/Next Alt/Drahi, a financial disaster in the making, in the way of Casino/Rallye/Naouri?

2018 was the year of market share recovery for SFR, Altice Europe’s key French subsidiary. It was also the year of Altice USA’s spin-off and other asset sales, contributing to a €16.85 billion debt deleveraging, as well as €5.25 billion in refinancing, extending the group’s weighted average debt maturity by six months. But it was actually just a year of kicking the can down the road. Altice Europe’s excessive indebtedness only got worse: its debt-repayment capacity deteriorated sharply from 12 years of available free cash flows[1] to close to a quarter of a century (24 years, to be precise), while its weighted average debt maturity is a much shorter 6-year long. In other words, it could currently take four times longer to repay such indebtedness than what is currently provided for in loan agreements and bond indentures. This is a real wager. Of course, the constrained and forced spin-off of Altice USA brought some breathing room, but only temporarily as the US activities contributed €3.07 billion to the overall free cash flow of the company in 2017: this explains why Altice Europe free cash flow is in free fall from €4.45 billion to €1.37 billion, year-to-year, a much bigger proportional drop than the one recorded in net debt which decreased from €53.83 billion to €33.53 billion. The sale of a 49.99% equity interest in SFR FTTH brought in an additional €1.7 billion in Altice Europe’s coffers, taking pro forma net debt down to €31.83 billion in March 2019.

 

 

On paper, Altice Europe will face substantial contractual repayment obligations starting in 2022, with €4.61 billion in current maturities that year. Unless it can… more than treble its free cash flow by then, a sheer wishful thinking and optimistic autosuggestion. As a matter of fact, in order to treble its free cash flow, Altice Europe’s EBITDA margin would have to outgrow from 38.9% in 2018 to… 61.6% in 2022. For comparison purposes, the weighted average EBITDA margin of 21 European listed telecoms slightly shrunk from 36.0% to 34.8% over the 12-year period (2006-2018), the best performance being recorded by Telecom Italia (TIM) at a 42.2% level in 2018. The most voluntarist equity research analysts forecast an EBITDA margin improvement of 2.5% to 3.0% by 2020 for Altice Europe, which can be extrapolated to a 5% to 6% margin upgrade by 2022 bringing it to a 44% to 45% level. We are still far away from the 23-point outgrowth that’s required to cover the debt maturities that year. Admittedly, Altice Europe still has unused revolving credit lines with banks to the tune of €2.16 billion, but validity dates of these borrowing commitments are not disclosed (we wonder why J…) and drawdowns of these loans are subject to conditions precedent of net debt to EBITDA (adjusted) covenant ceilings. In light of the company’s financial condition as of 31 December 2018 (net debt to EBITDA, unadjusted, ratio of 6.0x), one cannot assure that these credit lines will be available in 2022.

A quick estimate on the back of an envelope shows that, even if Altice operations reach an implausible EBITDA margin of 62% in 2022, lenders would still have to take a 13% haircut on their outstanding pro forma claims (post-SFR FTTH disposal) in order to fit in the 6-year weighted average maturity. If the EBITDA margin hits the 45% level, a more realistic haircut would balloon to… 58% of amounts outstanding, leaving creditors with a tonsure worthy of a Cistercian monk.

Thus, Altice Europe is vowed to keep kicking the can down the road, refinancing its debts hoping that the Junk bond market window won’t shutdown abruptly, as it does from time to time when institutional investors flee to more liquid, better quality and safer ventures.

Altice Europe’s lending vehicles had the following junk bond ratings with Moody’s and Standard & Poor’s as of 31 December 2018:

Issuer

Bond ranking

Moody’s/S&P ratings

Altice France

Senior secured

B2/B

Altice Luxembourg

Senior unsecured

Caa1/B-

Altice Financing

Senior secured

B2/B+

Altice Finco

Senior unsecured

Caa1/CCC+

 

The credit risk of Altice Europe is rated Single B by Alphavalue on 15 May 2019, which is the weakest rating among the 21 European listed telecoms and a tie with Hellenic Telecom (which suffers from the still high sovereign risk of Greece).

The corporate governance of Altice Europe is rated D by Proxinvest, the French managing partner of ECGS, for 2018. This ranks Altice at the 421st place, out of the 437 companies of the MSCI Europe stock market index, 24th out of the 26 Dutch companies and bottom of the 18 telecoms covered in that index.

We particularly relish the fact that Altice Europe and its auditors do not have any reservations over its “going concern” status at a 12-month horizon, which is the accounting principle on which its financial statements rely. Admittedly, had the company’s headquarters been registered and listed in the UK, instead of the Netherlands, the time horizon for asserting the “going concern” status would be 36 months, i.e. an entirely different kettle of fish. A very smelly fish, indeed, when contemplating 2022…

Proxinvest, the French managing partner of ECGS, forewarned as early as February 2016 about Casino/Rallye’s debt woes, with the relentless needs of Mr. Naouri for siphoning Casino’s dividend to repay Rallye’s current debt maturities. Likewise, while we do not have any specific information that would give credence to a piling-up of debts at the level of Next Alt, the personal holding company of Mr. Drahi, one can induce its existence. And it’s ever since September 2015 that we give fair warning about the dangers of the LBO privateer of the telecom sector.

As the popular saying goes, forewarned is forearmed.

 


1* Free cash flow = net cash provided by operating activities - acquisition of tangible and intangible assets and content rights.