Fitch IBCA Ratings - Press Releases - TPSA Ratings Assigned By Fitch IBCA

TPSA Ratings Assigned By Fitch IBCA
August 3, 1998

Fitch IBCA-London-3 August 1998: Fitch IBCA, the international rating agency, has assigned the following ratings to Telekomunikacja Polska S.A. (TPSA): 'BBB' long-term, constrained by the sovereign rating for Poland, and 'F3' short-term, also constrained.

TPSA is the Polish national telephone company offering fixed, wireless and data transmission services. It is state-owned but 20% of the company is to be privatised through an IPO in late 1998. TPSA has a monopoly to provide international services until January 2003, but will probably relinquish its monopoly for domestic long distance calls during 1999. There are a number of alternative local network operators whose licence areas cover half the Polish population, but at present, they provide only very rudimentary competition to TPSA in the local market and further consolidation will have to occur before they pose a material threat.

The Polish telephone network is underdeveloped by European standards with an average teledensity in 1997 of 19.3% (19.3 phone lines for every 100 people) compared with around 49% for the continent as whole. This is a result of a past lack of investment and TPSA has an ambitious, but essentially feasible, expansion programme that aims to raise teledensity to 40% by 2007. Poland has one of the fastest growing economies of central Europe and Fitch IBCA believes that the outlook for further growth, and thus demand for telephone services, is positive. The introduction of improved customer billing, information technology and management information systems is vital if the company is to operate more efficiently and these too form part of the investment plan. TPSA will fund its investment from the enhanced cash flows generated from its expanded network and by raising around USD3bn of debt over the next three years. Although coverage ratios will worsen as a result of this additional debt, the financial profile will still remain sufficiently robust to give adequate bondholder protection.

The ability to generate sufficient cash to fund investment and debt servicing is largely dependent on TPSA's business position. Liberalisation of the Polish telecoms market will result in a loss of market share, but this will be compensated by the general growth in traffic volumes. Experience elsewhere in Europe has shown that the incumbent operators have suffered few material adverse effects as a result of liberalisation because of the relative ubiquity of their networks and the strong influences they can have on pricing and costs of their competitors. A specific telecoms regulatory body will not be established until after the new Telecommunications Act is passed, probably in 2001, so that TPSA has some protection from downward pressure on its interconnect charges to competitors needing to use its network. Even with these advantages, TPSA faces the challenge of successfully reorganising a cumbersome corporate structure (on the basis of function rather than geography) and wholeheartedly embracing the culture of customer service that has hitherto been a low priority with many privatised utilities.

Wireless operations are conducted through TPSA's 64% owned subsidiary Centertel (the remainder is owned by France Telecom) which has licences for NMT 450 and DCS 1800 networks. The penetration rate for mobile phones in Poland is around 2.5%, but this market also has strong growth potential, spurred in part by the activities of two competitor GSM networks. TPSA's analogue network does have the widest coverage, but Centertel's future success lies in its DCS service (operations began in March 1998) and there is a reasonable likelihood that it will be awarded the last remaining GSM licence. Centertel has the capacity to raise its own non-recourse finance.

As the national telecoms operator TPSA has a strategic importance and solid business and financial positions that are unlikely to be eroded in the short term. In a higher rated sovereign environment, its rating would be above BBB and there is scope for it to rise should the Fitch IBCA sovereign rating be raised.

Contact: David Beardsall, London +44-171-417-4222.

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