Orange’s Baa1 rating affirmed, outlook revised to stable by Moody’s

Investing.com -- Moody’s Ratings has confirmed Orange’s Baa1 long-term issuer rating, Baa1 senior unsecured ratings, Baa3 junior subordinate rating, (P)Baa1 senior unsecured MTN program rating, (P)Baa3 junior subordinate MTN program rating, Prime-2 (P-2) commercial paper rating and its baa2 Baseline Credit Assessment (BCA). Simultaneously, the outlook for Orange has been revised to stable from positive.

Carlos Winzer, a Moody’s Ratings Senior Vice President and lead analyst for Orange, explained the change in outlook from positive to stable. He stated that the company’s operating performance will remain strong. However, the financial policy of the company, which is expected to stay unchanged in the mid-term, will limit further deleveraging from current levels.

In 2024, Orange achieved a solid operating performance, which led to a 2.7% increase in EBITDAaL (EBITDA after leases, as defined by the company) to €12.1 billion. This increase was mainly due to double-digit growth in the Africa and Middle East (MEA) segment. However, this was partially offset by slow growth in France and a continued decline in the Business segment. Thanks to an efficiency plan that aims for €600 million of cost savings by the end of 2025, Orange’s EBITDAaL margin increased by 0.4% to 30.4%.

Orange’s solid performance resulted in a Moody’s-adjusted net leverage of 2.5x. This was also driven by a decrease in net debt due to the €4.4 billion of proceeds received from the creation of MasOrange Holdco Limited (MasOrange, Ba3 positive).

Over the next 12 to 24 months, Moody’s does not expect Orange’s credit metrics to improve significantly above the thresholds required for a higher rating. The company is expected to reach €14.0 billion of Moody’s-adjusted EBITDA and improve its free cash flow (FCF) generation towards €800 million by 2026. During the same period, its Moody’s-adjusted net leverage and RCF/net debt ratios are expected to remain around 2.5x and 25%, respectively.

As of December 2024, Orange’s reported net leverage (measured as net debt/EBITDAaL, as defined by the company) of 1.8x is below its reiterated financial policy target of around 2.0x in the medium term. This suggests that further deleveraging from current levels is unlikely.

Orange’s complex corporate structure fully consolidates operating subsidiaries that are not fully owned and generate significant EBITAaL and operating cash flows. However, it has deconsolidated its highly leveraged joint venture in Spain in 2024. The MEA region, where most of the non-controlling interests are concentrated, is rapidly increasing its weight within the group. By 2026, the MEA region is expected to generate around 30% of the group’s cash flow, measured as EBITDAaL – Capex. The proportionate consolidation of subsidiaries adds about 0.5x of net leverage to the consolidated metrics.

The Baa1 long-term issuer rating continues to reflect Orange’s significant scale and international diversification, which strengthen its business model and reduce the impact of its exposure to the highly competitive French market. It also reflects the company’s commitment to maintain conservative financial ratios and a balanced shareholder distribution policy, reflected by its declared financial policy that includes a net leverage target of around 2.0x in the medium term (equivalent to a Moody’s adjusted net leverage of around 2.6x). Finally, it reflects the company’s excellent liquidity management, with sufficient available liquidity sources to cover the next two years of debt maturities.

Orange is classified as a Government-Related Issuer (GRI) based on the Government of France’s (Aa3 Stable) 23% ownership in the company, of which 9.6% is owned through BPI France. The final rating benefits from a one-notch uplift because of implicit government support.

Orange’s liquidity is excellent, supported by its positive cash flow generation, available cash resources, committed credit lines and the long-term and well spread debt maturity profile. As of December 2024, Orange had €8.4 billion of cash and cash equivalents (excluding cash at Orange Bank), €3.0 billion of highly liquid short-term investments and access to €5.9 billion of undrawn committed credit lines maturing in November 2029 and not subject to financial covenants. These sources of liquidity can cover all of Orange’s cash needs in 2025 and 2026, including bond maturities of approximately €2.4 billion and €1.6 billion, respectively.

The stable outlook reflects Moody’s expectation that Orange’s operating performance will remain solid and that management will maintain the stated leverage target of net debt/EBITDAaL (as measured by the company) of around 2.0x in the medium term.

Upward pressure on the rating could develop if the company’s debt protection ratios improve, such that its Moody’s-adjusted RCF/net debt ratio is at least 25% and its Moody’s-adjusted net debt/EBITDA improves comfortably below 2.5x, all on a sustained basis. Conversely, a rating downgrade could result if the group embarks on an aggressive debt-financed expansion or acquisition programme, resulting in increased financial, business and execution risks; or if the group’s credit metrics deteriorate, with its Moody’s-adjusted RCF/net debt falling below 18% or its Moody’s-adjusted net debt/EBITDA exceeding 3.0x on a sustained basis. Significant changes in the sovereign rating or changes in Moody’s assessment of default dependence and support, such as the government’s equity stake (economic rights) falling below 20%, could also lead to a downgrade.

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