Reuters logo
Fitch Revises VodafoneZiggo's Outlook to Negative; Affirms at 'BB-'
May 25, 2017 / 3:40 PM / 7 months ago

Fitch Revises VodafoneZiggo's Outlook to Negative; Affirms at 'BB-'

(The following statement was released by the rating agency) LONDON, May 25 (Fitch) Fitch Ratings has revised the Outlook on VodafoneZiggo Group BV's (VODZiggo) Long-Term Issuer Default Rating (IDR) to Negative from Stable. All ratings, including related instrument ratings are affirmed. A full list of rating actions is at the end of this comment. Fitch has revised its rating-case assumptions following guidance provided with the company's 1Q17 results. Based on this revised base case, Fitch is now forecasting funds from operations (FFO) net leverage to remain above the 5.2x downgrade threshold through 2019. The progress of the JV, uncertainties over the timing of synergies and ultimate upside from convergent opportunities, as well as how leverage policy will unfold, provide some latitude in how we view forecast metrics. The extended period of above-threshold leverage envisaged in our forecasts underpins the Negative Outlook. VODZiggo's ratings are supported by its strong underlying operating profile balanced by what in the near term is likely to be a weakened cash flow, and depending on management's intentions over shareholder payments, a period of heightened leverage. A good competitive position has been built on its fully upgraded cable network with near-nationwide coverage and soundly invested mobile network. The Dutch telecoms market is consolidating to a smaller number of larger players. The JV with Vodafone (VOD) enhances the operating profile and is likely over time to support more rational market pricing. KEY RATING DRIVERS Leverage, Negative Outlook: VODZiggo's 2017 guidance for operating cash flow (OCF) of EUR1.65 billion and shareholder payments of at least EUR500 million has been used to rebase Fitch's central rating case. The company closed 2016 with FFO net leverage (pro forma for EUR2.8 billion of escrow cash) of around 5.5x. Our revised forecasts expect this metric will remain at a similar level through 2019. A key variable in the forecasts is the cash distributed to shareholders; Fitch assuming guidance for 2017 to serve as something of a floor. A forecast metric above the 5.2x downgrade threshold for such a sustained period underpins the Negative Outlook. Cable Operations Stabilising: The cable operations appear to be stabilising following the integration difficulties faced by the group after the merger of Ziggo and UPC Netherlands in 2015. Cable subscription revenues have been flat in each of the past two quarters (to 1Q17), while operational metrics are also showing tangible signs of repair - revenue-generating unit losses had fallen to 5,000 in 1Q17 compared with 40,000 in 1Q16, and cable average revenue per user (ARPU) was up 3% in 1Q17 driven by subscription price rises. Fitch considers management action taken to improve the overall video offer and customer service should provide ongoing support for the cable business. Mobile Conditions Remain Challenging: Results for 1Q17 identify ongoing weakness in the former Vodafone NL mobile operations with the enlarged group's mobile revenues down 7% and the margin compression experienced across the group largely driven by mobile performance. Operational metrics confirm these pressures with both net customer additions and ARPU experiencing ongoing declines. At a market level service revenues continue to decline at low to mid-single-digit rates, the market yet to benefit from a more balanced competitive environment given what Fitch views as the convergent potential of the incumbent, KPN, and VODZiggo. Improved Market Structure: In an advanced communications market, convergence is in Fitch's view likely to become increasingly important in the service offer. Following the merger, the market structure will include VODZiggo and KPN as most obviously positioned to exploit convergence and to capitalise on cross-selling opportunities, leaving Tele2 and T-Mobile providing largely mobile only services. The benefits of market consolidation are likely to take time and it will be important for the VODZiggo integration to go well. In the near term it is possible that Tele2, in particular, will continue to be disruptive in mobile, placing continued pressure on this part of the business. Merger Benefits: Fitch views the combination of the Vodafone mobile assets with Ziggo's cable operations a good strategic fit. It brings together a near ubiquitous (92% population coverage) high-speed hybrid fibre cable network and strong triple-play cable offer with the country's second-largest mobile player. Vodafone had an estimated 33% mobile service revenue share at end-3Q16. Management are targeting combined opex and capex synergies of EUR210 million by 2020, delivery of which will be important given the dilutive effect of the lower margin mobile business. Public Leverage Target: VODZiggo's policy is to manage covenant leverage between 4.5x and 5.0x and to distribute excess cash to shareholders. Covenant leverage is based on an annualised OCF, adds back 75% of targeted opex synergies and excludes vendor financing liabilities. Fitch estimates these adjustments to understate forecast 2017 leverage by around 0.5x. Some of the delta will ameliorate as synergies are delivered. However, the basis of how financial policy is defined and the level of shareholder payments made, may keep FFO net leverage at or higher than the downgrade guideline if management choose to manage close to the high end of target leverage. DERIVATION SUMMARY VODZiggo's ratings are underpinned by a solid operating profile, strengthened by the prospect of a strong convergent position following formation of the JV and an improved operating environment. The cable business appears to be stabilising. Its mobile operations remain under pressure given the competitive environment, while the company exhibits weaker financial metrics than would be expected at the rating level, including high leverage. The company's closest peers - Virgin Media Inc. and Telenet N.V. (both BB-/Stable) - offer similar characteristics in terms of business and market potential, but are performing more strongly operationally and have stronger financial metrics. Fitch expects business performance at VODZiggo to stabilise and improve over time. Where the rating stabilises will depend on the timing of integration benefits and recovery in the mobile business, along with the shareholders' ultimate intentions with respect to distributions and leverage. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for 2017 are listed below. - 2017 OCF/EBITDA before integration costs (of EUR30 million) of EUR1.68 billion. This value includes the shareholder recharges of around EUR210 million - EUR50 million integration costs taken below FFO. - 50% of shareholder recharges written back to FFO - reflecting their capex nature. - Capex to sales of around 23% - including EUR105 million of shareholder recharge capex, with capex/sales excluding the recharge of around 21% in line with public guidance. - shareholder payments of i) EUR2.8 billion (the JV recap) and ii) EUR500 million. The following forecast years reflect stabilisation/low single-digit growth in revenues and margin expansion reflecting scale economies and the delivery of synergies. - integration costs of EUR280 million are taken below FFO and assumed EUR50 million in 2017; EUR90 million in 2018 and 2019, declining thereafter, - shareholder payments to remain at least EUR500 million a year. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - FFO adjusted net leverage sustainably below 4.5x (5.5x at end-2015), with strong and stable FCF generation, reflecting a stable competitive and regulatory environment Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Failure to reduce FFO adjusted net leverage to below 5.2x by end-2018 (5.5x at end-2016) on a consistent basis -Further deterioration in competitive pressures and inability to show recovery in operational performance LIQUIDITY Sound Liquidity: At end-1Q17 the company reported cash of EUR273 million and an undrawn credit facility due 2022 of EUR800 million. Experience across the Liberty Global group is that cash is typically managed at low levels. Comments from VODZiggo's joint shareholders indicate this is also likely to be the case in the JV and available excess cash upstreamed to the shareholders. The debt structure is a combination of secured bank and bond debt, and unsecured bonds. Vendor financing is not included in covenant leverage but is included in all Fitch defined metrics. FULL LIST OF RATING ACTIONS Company Name VodafoneZiggo Group BV Long-Term Issuer Default Rating (IDR):'BB-' affirmed; Outlook revised to Negative from Stable Ziggo B.V. Secured Bank Debt/Secured Notes:'BB+'/'RR1' affirmed Ziggo Secured Finance B.V. Secured Bank/Secured Notes:'BB+'/'RR1' affirmed Ziggo Secured Finance Partnership Secured Bank Debt 'BB+'/'RR1' affirmed LGE HoldCo VI B.V. Senior Notes:'B'/'RR6' affirmed Ziggo Bond Finance B.V. Senior Notes:'B'/'RR6' affirmed Contact: Principal Analyst Alex Cherepovitsyn, CFA Analyst +44 20 3530 1755 Brendan Condon Director + 44 203 530 1599 Supervisory Analyst Stuart Reid Senior Director +44 20 3530 1085 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Tajesh Tailor Senior Director +44 20 3530 1726 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below