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• Content META

  Title	U.K.-Based TalkTalk Telecom Group Ltd. Upgraded To 'CCC+' From 'D' On Completed Debt Restructuring; Outlook Stable
  ID	5282457
  External ID	7405938874
  Author	Unknown
  Published Date	Dec. 19, 2024, 8:52 p.m.
  Summary	TalkTalk Telecom Group Ltd. (TalkTalk) has completed a debt restructuring that improved its debt maturity profile and short-term liquidity position. However, we view TalkTalk's capital structure as u
  Tags	None
  URL	https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/type/html/id/3302356
  Sentiment	Negative: 0.01343    Neutral: 0.07227    Positive: 0.91429
  Relevance	0.03540

• Content Details

  Content ID	3190262
  Key	92161496-755b-41d3-9033-b4f41b45842f
  Content	TalkTalk Telecom Group Ltd. (TalkTalk) has completed a debt restructuring that improved its debt maturity profile and short-term liquidity position. However, we view TalkTalk's capital structure as unsustainable due to very high financial leverage and uncertainty over its ability to turn around its business performance, making it dependent upon favorable business, financial, and economic conditions to meet its financial commitments. We raised our long-term issuer credit rating on TalkTalk to 'CCC+' from 'D' (default). We also assigned our 'B-' issue rating and '2' recovery rating to TalkTalk's £562 million senior secured first-lien notes; and our 'CCC-' issue rating and '6' recovery rating to the £332 million second-lien notes. The stable outlook reflects our view that TalkTalk's financial performance will stabilize in fiscal 2026 (year ended Feb. 28) on cost savings, ethernet growth, and improving average revenue per user (ARPU), and despite continued customer attrition in the consumer segment, resulting in breakeven free operating cash flow (FOCF) after leases from fiscal 2027 and sufficient liquidity to cover cash interest payments, working capital, and capital expenditure (capex) needs. LONDON (S&P Global Ratings) Dec. 19, 2024—S&P Global Ratings today took the rating actions listed above. Rating Action Rationale TalkTalk has completed a debt restructuring that improved its maturity profile and liquidity position. The company has completed a debt restructuring and exchanged its £330 million senior secured revolving credit facility (RCF), its £685 million senior secured notes, and new funding by shareholders into new first- and second-lien instruments that extended their maturities. The new capital structure includes: First-lien senior secured debt totaling £650 million, including £562 million notes and an £88 million term loan, maturing in September 2027, carrying cash interest of Sterling Overnight Index Average (SONIA) plus 4%, with the option for SONIA plus 4% payment-in-kind (PIK) and 0.5% cash for the first two coupons. Second-lien debt totaling £384 million, including £332 million notes and a £52 million term loan, maturing in March 2028, carrying SONIA plus 7.5% pay-if-you-can (PIYC) interest. A £181 million second-lien new money facility maturing in March 2028, carrying SONIA plus 7.5% PIYC interest. This instrument ranks pari passu with the other second-lien debt. The transaction also included shareholders transferring the Virtual1 business and Shell and OVO branded customer bases to TalkTalk Telecom Group Ltd. to enhance the restricted group's collateral. The maturity of the £450 million PIK facility issued by TalkTalk FinCo Ltd. above the restricted group was extended to April 2028. We continue to view TalkTalk's capital structure as unsustainable due to a very high debt burden. We forecast adjusted leverage in fiscal 2025 to peak at 11x and remain very high above 9x in fiscal 2026. With the restructuring, TalkTalk's debt will increase to £2.8 billion (£1.9 billion excluding lease liabilities) in fiscal 2025, from £2.4 billion (£1.5 billion excluding lease liabilities) in fiscal 2024. This is mainly due to £235 million injected by TalkTalk's shareholders, most of which was converted into second-lien debt as part of the transaction. We expect debt will keep increasing to above £3.1 billion (£2.2 billion excluding lease liabilities) by fiscal 2027 because we expect the second-lien debt will accrue PIK interest of SONIA plus 7.5%, while the £450 million PIK facility issued by TalkTalk FinCo will also accrue PIK interest. We see execution risk related to the company's business plan. TalkTalk completed the separation of the consumer and wholesale business in March 2024, and has started to execute its new business plan, which involves a cost-cutting program and return to cash generation. The company expects to reduce operating and exceptional costs by £120 million in total, of which it expects to achieve £72 million by fiscal year-end 2026. TalkTalk is focusing on streamlining operations after the business split, cutting legacy costs from internal systems, reducing the workforce, and reducing subscriber acquisition costs by focusing on higher-value customers and increasing the share of alternative network wholesale providers, which provide cheaper connectivity than Openreach. We see execution risks to the company's business plan, including its ability to (1) successfully and timely execute on the cost-saving program, (2) increase prices and ARPU in the competitive U.K. broadband market, (3) mitigate customer losses, and (4) effectively manage supplier costs given the company's limited network ownership, and still-high exposure to wholesale network provider Openreach. We expect TalkTalk to achieve revenue growth of about 2% per year from ethernet growth and increased fiber uptake driving higher ARPU. This will be partially offset by customer losses, particularly in the consumer business, which we expect will continue throughout our forecast at an average rate of 4% per year in fiscal years 2025 and 2026 (excluding the effect of the Shell customer base). TalkTalk's overall customer base has been declining for several years, to 3.4 million in first-half fiscal 2025 from 3.9 million in 2023. We expect S&P Global Ratings-adjusted EBITDA will gradually recover to 20% by fiscal year-end 2026 from 15% in fiscal 2024, supported by planned cost savings and reduced one-off costs. TalkTalk's liquidity position has improved, but we expect limited headroom over the next 12 -24 months. Following the restructuring, we estimate TalkTalk will have sufficient liquidity in the next year, but it will be constrained by still-negative free cash flow after leases in fiscal 2026 and vulnerable to operating underperformance or adverse working capital fluctuations. In fiscal 2026, TalkTalk will benefit from low cash-interest payments, thanks to the option to PIK most of the first two coupons on the £650 million first-lien debt, which we expect it will use. Thereafter, liquidity will likely remain tight as cash interest increases to £60 million in fiscal 2027 from £10 million in fiscal 2026, but we expect this will be offset by improved cash generation thanks to cost savings. We also expect that in fiscal years 2026 and 2027, the company will benefit from the option to accrue the PIYC interest on the second-lien debt in any interest period where cash levels are forecast to be below £50 million. TalkTalk's liquidity position will benefit as the company achieves the planned cost savings and reduces capex. We expect capex will decline toward £75 million in fiscal 2026 from £126 million in fiscal 2024 due to the completion of large one-off projects that we do not expect to recur. Outlook The stable outlook reflects that we expect TalkTalk's financial performance will stabilize in fiscal 2026 on cost savings, ethernet growth, and improving ARPU, and despite continued customer attrition. We expect FOCF after leases will be break-even from fiscal 2027 and assume liquidity will remain sufficient to cover cash interest payments, working capital, and capex needs. Downside scenario We could lower our rating on TalkTalk if we believed that a default was increasingly likely in the next 12 months due to operating underperformance leading to a liquidity shortfall, or if there was an increasing chance of another debt restructuring. Upside scenario We are unlikely to raise our rating on TalkTalk in the next year due its very high debt burden and substantial PIK interest that we expect to accrue. Beyond then, we could raise the rating if the company's capital structure became more sustainable, supported by lower debt levels and substantially stronger operating performance with sustainable revenue and earnings growth, and positive cash flow after lease payments. Environmental, Social, And Governance Governance factors are a moderately negative consideration in our credit rating analysis of TalkTalk. Our assessment of the company's financial risk profile as highly leveraged reflects corporate decision-making that prioritizes the interests of the controlling owners, which is the case for most rated entities owned by private-equity sponsors. Our assessment also reflects their generally finite holding periods and a focus on maximizing shareholder returns. The company is working on strengthening its control functions and financial systems following auditors' findings highlighted in its fiscal 2024 annual report, and we do not expect any meaningful impact or financial restatements following the auditor changing to RSM. Related Criteria Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.spglobal.com/ratings for further information. A description of each of S&P Global Ratings' rating categories is contained in "S&P Global Ratings Definitions" at https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/sourceId/504352. Complete ratings information is available to RatingsDirect subscribers at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.spglobal.com/ratings. Alternatively, call S&P Global Ratings' Global Client Support line (44) 20-7176-7176. Regulatory Disclosures For Each Credit Rating Including Ratings List Table Disclosures include requirements relating to press releases or reports published in accordance with Article 10(1), 10(2), and 10(5), and Annex I, Section D, I, 1, 2, 2a, 4, and 5. These requirements are available by rating via the link titled "Regulatory Disclosure" and include, but are not limited to: Key Elements Underlying The Credit Rating ESG Credit Factors Solicited Or Unsolicited Status Analysts Primarily Responsible For The Credit Rating Office Responsible For The Credit Rating Materials Used In The Credit Rating Process Criteria Applied Models Applied, Loss, And Cash Flow Analysis Performed Scenario Analysis Sensitivity Analysis Risk Warning, Understanding Credit Rating Categorizations, And Criteria Rated Entity Notification Ancillary And Additional Services Attributes And Limitations Of The Credit Rating Information Specific To Structured Finance And Securitization Instruments Contact the analysts:
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  Publisher Name	S&P Global
  Publisher URL	https://www.spglobal.com
  Description	None
  Trust Flow Score	33
  Citation Flow Score	43

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  Data Source Name	Quantexa News
  Data Source Type	news
  Data Source URL	https://app.aylien.com/dashboard
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  Weight	10