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S&P as damning as Moody's on Avanti - its implied view also that the shares are worth 0p

By Tom Winnifrith, The Sheriff of AIM | Friday 29 July 2016

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Moody's was damning enough on Avanti Communications (AVN) as I noted earlier. The clear takeaway was that the shares were worth 0p given Moody's view that bondholders were in for a haircut. Now I bring you what the other credit rating agency S&P says. It is equally bearish.

On July 12, S&P Global Ratings said it had lowered its long-term corporate credit rating on U.K.-based fixed-satellite services (FSS) provider Avanti Communications Group PLC (Avanti) to 'CCC-' from 'B-'. The outlook is negative.

At the same time, it lowered our issue ratings on the company's senior secured debt to 'CCC' from 'B'. The recovery rating is unchanged at '2', indicating an expectation of substantial recovery prospects in the event of default in the lower half of the 70%-90% range.

S&P said that it was "unlikely that Avanti will meet its financial obligations in 2016". Hence it lowering its long-term corporate credit rating on Avanti to 'CCC-' from 'B-' and removing it from CreditWatch with negative implications.

The negative outlook reflects the possibility that S&P could lower the ratings on Avanti further over the next few months if it is not able to secure meaningful additional financing.

The downgrade and negative outlook follows Avanti's announcement on July 7, 2016, that it may not have access to sufficient liquidity to meet its funding requirements through the second quarter of the FY2017 unless it secures additional funding or delivers on contingency cost reduction or deferral measures.

Avanti is negotiating an export credit agency facility, but the full availability of the facility requires Avanti to raise at least $50 million in equity. The company will seek to raise equity from existing and other potential strategic investors. Avanti is also conducting a wider strategic review which may lead to a merger or sale of the company. The board has also identified possible cost-saving initiatives in operations and capital expenditure (capex) to save up to $58 million over a three-year period.

Given the uncertainties, S&P says it has not included any additional financing into its base case. Furthermore, it says:

"we do not think that the identified cost-saving initiatives could solve Avanti's short-term liquidity challenges. This is due to our understanding of management's commitment to finalize the construction and launch of the HYLAS 4 satellite by the third quarter of FY2017 and its mainly fixed cost base. Cash reserves of $57 million are lower than we had previously expected--mainly due to very negative working capital development.  Along with our assumption of negative operating cash flow, we think it is highly unlikely that Avanti will meet all of its financial obligations in the first half of FY2017. "

S&P added:

"we still see meaningful execution risks in filling satellite capacity quickly and reaching sufficient revenue levels to generate positive cash flow.The negative outlook reflects the possibility that we could lower the ratings on Avanti further over the next few months if it is unable to secure meaningful additional financing. We could lower the long-term rating to 'CC' if Avanti is unable to secure meaningful additional financing, as we think this would make a short-term default inevitable."

If S&P is this damining on the bonds the shares are clearly worth 0p

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