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TEXT-S&P affirms Unitymedia, KBW ratings
April 5, 2012 / 5:52 PM / 5 years ago

TEXT-S&P affirms Unitymedia, KBW ratings

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.

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