Concurrently, Moody's upgraded the rating on the senior secured Notes due 2014 to Caa1 from Caa2. The corporate family rating (CFR) and probability of default rating (PDR) have been affirmed at Caa1; and the rating on the stub of unsecured notes due 2017 at Caa3.

RATINGS RATIONALE

Bite's Caa1 CFR reflects (i) the company's relatively small scale in the global telecommunications industry; (ii) its narrow geographical focus on the Lithuanian and Latvian markets; (iii) Bite's relatively weak market position as a "challenger" in Latvia; (iv) the impact on the company's available liquidity of the expiry of its revolving credit facility over the next 12 months.

The rating also takes into account (i) the company's established market position in Lithuania; (ii) the positive free cash flow generation in 2011 which is expected to be maintained in the future; (iii) EBITDA margins improvements on the back of tight cost control programmes in the last couple of years; and (iv) our expectation that the declining trend in revenues in Lithuania has now stabilised.

The positive outlook reflects the steady improvement in performance over the last 6 quarters driven by a slowdown in the decline of the Lithuanian revenues and Latvia's EBITDA turning positive. This has led to an improvement in credit metrics, with adjusted Debt/EBITDA decreasing to 4.0x at end H1 2012 from 4.5x at the end of 2011 and 5.3x at the end of 2010.

Over the last three years, Bite has experienced a strong decline in its top line revenues driven by its Lithuanian operations which still generate the majority of Bite's revenues (80% for 2011). This decline in revenues came despite Bite's Lithuanian SIM market share remaining stable over that period and reflected the impact of reduced consumer spending in a period of economic strain as well as the negative impact of regulatory driven cuts to the interconnect rates in Lithuania. Although the general macro-economic landscape remains uncertain and ARPU growth could continue to be volatile, we expect that cuts in Lithuania's mobile termination rate (MTR) should now have ended as their level fell from 10 Eurocents to 1.6 Eurocent since 2009. The level imposed by the European regulation is 1 Eurocent which, Moody's believes should have a low impact on Bite's Lithuanian future revenues.

In Latvia, Bite has a revenue market share well below its two main competitors', LMT and Tele2. However, Bite has achieved substantial growth in Latvia through marketing initiatives that led to subscribers growing rapidly in the last couple of years. Latvia's positive revenues trends were also aided by MTR cuts which, in Latvia, represent a net cost to the company due to its smaller subscriber base vs. competitors. This led to Latvia's EBITDA turning positive in 2011 (EUR3.0 million) for the first time and the planned further MTR cuts should continue to support EBITDA growth for Bite Latvia.

Despite the group's revenues decline in the last three years, Bite managed to maintain positive EBITDA growth, +17% in H1 2012 vs. H1 2011 and +12% in FY2011 vs. FY2010. The company improved EBITDA margins through a cost rationalisation programme which saw it reduce headcount and subscriber acquisition costs, renegotiate supplier contracts and eliminate handset subsidies for the consumer segment of its subscriber base. These efforts, along with Latvia's EBITDA turning positive, meant that Bite's EBITDA margin for 2011 grew to 25% from 22% in 2010 and 17% in 2009.

In the medium term, we expect costs to rise slightly as the company invests in network modernization in Lithuania and provides for the network to be LTE ready in both countries, and keeps strong marketing campaigns in Latvia to support brand positioning, incl. campaigns to counteract the increased churn in its prepaid segment. However, we believe that these costs along with any future capital expenditure should not lead to a substantial decline of EBITDA margin.

Bite's liquidity is currently adequate as the company generates positive free cash flow (EUR17 million in 2011) and retains EUR27 million under its EUR35 million RCF at the end of H1 2012. Against these, the company has capex requirements expected in the EUR14 million to EUR18 million range and no debt maturities before 2014. However, availability under the RCF reduces progressively, with the RCF maturing in June 2013.

Bite's PDR of Caa1 is at the same level as the CFR, reflecting an assumed loss given default rate of 50%. The upgrade of the 2014 Notes reflects the reduced amount of revolver debt outstanding and ranking ahead of the bonds, and hence reduced subordination.

The positive outlook assumes that the observed slowdown in Lithuania's top line decline will persist and that the company's EBITDA margin will remain in the 20-25% range. The outlook also assumes that Bite's liquidity profile will not deteriorate as the company looks to refinance its RCF in a timely manner.

Negative pressure on the rating could develop should:(i) a weakening develop in Bite's liquidity position and/ or (ii) Bite's Gross Debt/ EBITDA (as calculated by Moody's) trend towards 4.5x.

Positive rating pressure could develop as (i) the operations in Lithuania continue to show signs of stabilisation; (ii) Bite Latvia's EBITDA continues to grow in line with expectations; (iii) positive free cash flow generation is maintained strengthening Bite's liquidity profile; and (iv) leverage as calculated by Moody's adjusted debt/EBITDA falls below 4x.

The principal methodology used in rating Bite Finance International B.V was Moody's Global Telecommunications Industry Rating Methodology published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Bite Finance International B.V. is the Dutch holding company of the Lithuanian company Bite Lietuva UAB. Bite is a mobile telecommunications operator in Lithuania and Latvia, which reported 2011 revenue of about EUR172 million. In February 2007 a private equity consortium led by Mid Europa Partners acquired Bite through a leveraged buyout for a total consideration of EUR443 million.

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Christian Azzi Analyst Corporate Finance Group Moody'sInvestors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Chetan Modi MD - Corporate Finance Corporate Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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