April 5 - Overview -- Liberty Global Inc. (LGI), the owner of 100% of the German cable operators Unitymedia and KBW, announced an exchange offer for the outstanding debt at KBW and a potential merger of both subsidiaries. -- We are affirming our long-term ratings on Unitymedia and KBW and affirming our issue ratings on the current KBW and Unitymedia debt. -- In addition, we are assigning 'BB-' issue ratings on the proposed new senior secured notes and 'B-' issue ratings on the proposed senior notes, issued by Unitymedia entities in the exchange offer. -- The stable outlook on both Unitymedia and KBW reflects the outlook on LGI, given the considerable influence that the parent exercises over both entities' business and financial policy and, consequently, their credit quality. Rating Action On April 5, 2012, Standard & Poor's Ratings Services affirmed the 'B+' long-term ratings on Germany-based cable operators Unitymedia GmbH and Kabel BW Erste Beteiligungsgesellschaft mbH. The outlook is stable. At the same time, we are affirming the issue ratings on the existing debt issued by Unitymedia entities. The recovery ratings on these debt instruments remain unchanged. In addition, we are affirming the issue ratings on the existing debt issued by KBW entities. The recovery ratings on these debt instruments remain unchanged. We expect to withdraw the ratings on KBW's existing debt upon the completion of the exchange offer. Furthermore, we assigned 'BB-' issue ratings on the like-for-like senior secured notes and 'B-' issue ratings on the like-for-like senior notes that have been proposed under the Unitymedia debt exchange offer. The recovery ratings on the proposed instruments are '2' and '6', respectively. The '2' recovery rating reflects our expectation for 70% to 90% recovery in the event of a default. The '6' recovery rating reflects our expectation for 0% to 10% recovery in the event of a default. Rationale The affirmation of the corporate credit ratings on Unitymedia and KBW reflects our opinion that the announced exchange of KBW's outstanding debt into Unitymedia notes does not change our current assessment of the respective business risk and financial risk profiles. Furthermore, the corporate credit ratings on both entities remain capped by the rating on their owner, U.S.-listed, international cable-TV (CATV) operator and broadband services provider Liberty Global Inc. (LGI; B+/Stable/--), primarily due to LGI's full control over the corporate strategy and financial policy of both subsidiaries. However, we factor in ongoing parental support in our assessment of Unitymedia's and KBW's liquidity profile, which we consider "adequate." We assess the stand-alone credit profile (SACP) of both KBW and Unitymedia as 'b+', at the same level as the long-term corporate credit ratings. We understand that a successful exchange offer, with more than 50% of the lenders' consent, would allow LGI to merge Unitymedia and KBW. Should this merger take place, we expect that Unitymedia will have a long-term rating of 'B+', in line with the current standalone SACP on both LGI subsidiaries. Our financial risk profile assessment takes into account the still-high, pro forma Standard & Poor's-adjusted gross leverage for the combined operations of about 6x as of Dec. 31, 2011, following the exchange offer and a potential subsequent merger. On Dec. 31, 2011, Unitymedia's gross leverage, as adjusted by Standard & Poor's, was 5.2x and KBW's adjusted gross leverage stood at 7x. In addition, the financial risk profile reflects what we see as LGI's very aggressive financial policy and the moderate free operating cash flow generation we expect for the combined entity, owing to high interest payments and significant subscriber acquisition costs for triple-play services. This is partly offset by the group's long-term capital structure, with no meaningful debt maturities until 2017 on a joint basis. Moreover, both companies face only modest maintenance capital expenditures for their largely upgraded cable networks. Unitymedia's and KBW's "satisfactory" business risk profiles remain supported by our view of their stable and very profitable utility-like CATV business. Their sizable EBITDA growth potential through further uptake of high-speed Internet (HSI) and telephony services (together with digital-TV services called "triple play") also support their business risk profiles. In addition, we expect their profitability and cash flow generation to benefit from moderate cost synergies through a potential merger of the two entities. However, CATV revenues are exposed to competition from various technology platforms, such as satellite TV, digital terrestrial TV, and Internet-Protocol TV (IPTV), which could become a more serious challenger to CATV from 2012 onward, in our view. Liquidity We continue to view both Unitymedia's and KBW's standalone liquidity as adequate under our criteria. This is based on our view that each company's sources of liquidity, including facility availability, will exceed their uses by more than 1.2x in 2012. Furthermore, we expect that following the potential merger, the combined entity would also maintain an adequate liquidity profile and that LGI would provide timely and sufficient liquidity support, if necessary. We understand from the exchange offer documentation that, following a successful conversion of the KBW notes into Unitymedia debt, the joint company would not have any meaningful maturities until 2017 and that it will not have to comply with maintenance covenants. At the same time, additional indebtedness will remain limited to 4x senior secured and 5x senior gross leverage. As of Dec. 31, 2011, Unitymedia reported cash of EUR20 million and a fully drawn EUR80 million revolver, while KBW reported cash of EUR26 million and an undrawn revolver capacity of EUR100 million. Recovery analysis We have updated our recovery analysis in view of the exchange offer and the potential merger of Unitymedia and KBW. Our revised assumptions of a combined group depend on a successful exchange transaction and the anticipated completion of the subsequent merger. In this context, we refer to the notes subject to the exchange offer as the proposed notes. The issue rating on the proposed EUR1.6 billion of senior secured notes is 'BB-', one notch above the corporate credit rating on Unitymedia. The recovery rating on these notes is '2', indicating our expectation of substantial (70% to 90%) recovery prospects for secured lenders in the event of a payment default. We see coverage of the senior secured notes at the low end of the range. The issue rating on the proposed EUR680 million senior unsecured notes is 'B-', two notches below the corporate credit rating on Unitymedia. The recovery rating on these notes is '6', indicating our expectation of negligible (0% to 10%) recovery in the event of a payment default. The recovery ratings on Unitymedia's existing senior secured notes are unchanged at '2', indicating our expectation of substantial (70% to 90%) recovery prospects in the event of a default where we see recovery prospects at the low end of this range. The issue rating on these notes is 'BB-', one notch above the corporate credit rating for Unitymedia. The recovery rating on the senior notes is unchanged at '6', indicating our expectation of negligible (0% to 10%) recovery prospects in the event of a default. Our recovery and issue ratings on KBW's outstanding debt facility and notes are unchanged, and we expect to withdraw these ratings on the completion of the exchange offer. Our recovery ratings on the proposed and existing senior secured notes are underpinned by our assessment of what we see as a comprehensive security package, including first-priority pledges over substantially all the assets of the combined companies, including network assets. The documentation for the new notes is in line with existing debt issues. We consider Germany, where Unitymedia and KBW have their headquarters, to be a relatively favorable jurisdiction for creditors in the event of insolvency proceedings. We have revised our valuation and default scenario to incorporate KBW. Our simulated default scenario assumes a default would occur in 2017, when about EUR2 billion of senior secured notes mature, due to excessive leverage as a result of operating underperformance. We envisage EBITDA falling to about EUR585 million, with a stressed enterprise value of about EUR3.4 billion. We value Unitymedia and KBW as a going concern, given its resilient and profitable utility-like CATV operations in Germany, its satisfactory business risk profile, valuable cable network and customer base, and high barriers to entry in the consolidated cable industry. From our stressed enterprise value of EUR3.4 billion, we deduct priority liabilities of about EUR330 million, comprising administrative expenses associated with reorganization, the existing EUR80 million super senior revolver (fully drawn), and other priority liabilities related to finance leases and 50% of pension obligations. This leaves approximately EUR3.0 billion of value remaining for senior secured noteholders. We envision about EUR4.1 billion of senior secured debt outstanding at default (including the existing KBW senior secured notes and six months' prepetition interest), indicating substantial (70% to 90%) recovery prospects for these lenders. Embedded in our assumption is our expectation that the company will raise an additional revolving credit facility during 2012 on a pari passu basis with senior secured noteholders (the documentation of the notes only allows for an EUR80 million super senior revolver). We would expect negligible (0% to 10%) recovery prospects for senior noteholders. Outlook The stable outlook reflects the outlook on LGI, given the considerable influence that the parent exercises over Unitymedia's and KBW's business and financial policy and, consequently, the subsidiaries' credit quality. We could consider a downgrade if we lowered the long-term rating on LGI or if the two subsidiaries were unable to maintain adequate liquidity at all times and, concurrently, liquidity support from LGI were not forthcoming. Although we do not expect it at this stage, we could also lower the rating on Unitymedia or KBW if their ratio of adjusted debt to EBITDA were to increase to more than 6x, for example, as a result of a debt refinancing or operational underperformance. Rating upside is capped at the rating on LGI at this stage. Related Criteria And Research -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link To Parent, Oct. 28, 2004 -- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009 Ratings List Ratings Affirmed Unitymedia GmbH Unitymedia Hessen GmbH & Co. KG Unitymedia Management GmbH Kabel BW Erste Beteiligungsgesellschaft mbH Kabel BW GmbH Kabel BW Musketeer GmbH Corporate Credit Rating B+/Stable/-- Ratings Affirmed Unitymedia GmbH Subordinated* Local Currency B- Recovery Rating 6 Unitymedia Hessen GmbH & Co. KG Senior Secured(4) EUR1.43 bil 8.125% bnds due BB- 12/01/2017 Recovery Rating 2 US$845 mil 8.125% bnds due BB- 12/01/2017 Recovery Rating 2 Unitymedia NRW GmbH Senior Secured(4) EUR1.43 bil 8.125% bnds due BB- 12/01/2017 Recovery Rating 2 US$845 mil 8.125% bnds due BB- 12/01/2017 Recovery Rating 2 Kabel BW Musketeer GmbH Subordinated(4)* EUR680 mil 9.5% nts due 03/15/2021 B- Recovery Rating 6 Kabel BW GmbH Senior Secured(4)* US$500 mil 7.5% nts due 12/31/2019 BB- Recovery Rating 2 EUR800 mil 7.5% nts due 03/15/2019 BB- Recovery Rating 2 EUR420 mil fltg rate nts due BB- 03/15/2018 Recovery Rating 2 New Rating Unitymedia GmbH Subordinated* EUR680 mil 9.5% nts due 03/15/2021 B- Recovery Rating 6 Unitymedia Hessen GmbH & Co. KG Senior Secured(4) US$500 mil 7.5% nts due 03/15/2019 BB- Recovery Rating 2 EUR800 mil 7.5% nts due 03/15/2019 BB- Recovery Rating 2 EUR420 mil fltg rate nts due BB- 03/15/2018 Recovery Rating 2 *Guaranteed by Unitymedia Management GmbH, Unitymedia Hessen Verwaltung GmbH, Unitymedia NRW GmbH, Unitymedia Hessen GmbH & Co. KG. (4)Guaranteed by Unitymedia Hessen Verwaltung GmbH, Unitymedia Management GmbH, and Unitymedia Management GmbH. (4)*Guaranteed by Kabel BW Erste Beteiligungsgesellschaft mbH. Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.