(The following statement was released by the rating agency)
Jan 10 -
Summary analysis -- Ziggo Bond Co. B.V. --------------------------- 10-Jan-2013
CREDIT RATING: BB/Stable/-- Country: Netherlands
Primary SIC: Communications
Credit Rating History:
Local currency Foreign currency
02-Apr-2012 BB/-- BB/--
22-Apr-2010 B+/-- B+/--
The ratings on Netherlands-based Ziggo Bond Co. B.V., the indirect full owner of the largest Dutch TV cable operator, reflect Standard & Poor’s Ratings Services’ view of the group’s “satisfactory” business risk profile and “aggressive” financial risk profile, as our criteria define the terms.
The ratings are constrained by Ziggo’s aggressive financial risk profile, which reflects both the company’s majority ownership by private equity sponsors and its stated financial policy. Conversely, we consider that the business risk profile is underpinned by Ziggo’s strong cable and overall TV market position in an attractive market and its state-of-the-art network. These factors translate into very high margins and strong free cash flow generation, and should allow revenue growth through consumers’ ongoing shift to digital and bundles. That said, we are also mindful of the head-to-head competition Ziggo faces against domestic incumbent Koninklijke KPN N.V. (KPN; BBB/Watch Neg/A-2), and the latter’s gradual rollout of very high bit-rate digital subscriber line or fiber, which could narrow Ziggo’s advantage over time.
S&P base-case operating scenario
In our base-case assessment, we anticipate that Ziggo’s increasing share of the bundled-product market and the shift to digital from analogue will allow for 3%-5% revenue growth for 2012-2013 on average, after a buoyant 4.9% revenue increase in the first nine months of 2012. We anticipate that blended average revenue per user will continue increasing on the back of growth in bundled offerings, digital TV, and related services such as premium TV channels.
While we note that Ziggo has a track record of very high profitability, we think that the EBITDA margin may have peaked and could decline somewhat from the very high 57.4% achieved in the first nine months of 2012. This erosion could result from further spending on customer services and marketing to compete against KPN’s ambitious fixed broadband turnaround targets. In addition, gross margins on digital TV are lower than on analogue. These impacts will likely be cushioned by better fixed-cost absorption, however.
S&P base-case cash flow and capital-structure scenario
In our base-case scenario, we forecast robust free cash flow of about EUR300 million-EUR400 million annually for the next two years. However, we think that Ziggo will likely distribute a large part of its free cash flow to its shareholders, as the company’s leverage stood at 3.4x at the end of September 2012, already within its financial policy target of a long-term net debt-to-EBITDA ratio of about 3.5x. We anticipate that the company’s financial policy target will consistently translate into a Standard & Poor‘s-adjusted debt-to-EBITDA ratio of less than 4x, which we think is adequate for the rating.
We assess Ziggo’s liquidity as “adequate” under our criteria, reflecting the absence of debt amortization through 2017 and our expectation of consistently robust discretionary cash flow, balanced by likely aggressive shareholder distributions.
As of Sept. 30, 2012, we estimate that the company’s sources of liquidity for the following 12 months will comfortably exceed uses by more than 1.2x. We anticipate that liquidity sources will include:
-- About EUR600 million in funds from operations;
-- More than EUR200 million in cash; and
-- A EUR50 million undrawn committed facility maturing in September 2014.
Our forecasts of Ziggo’s liquidity needs over the same period include:
-- About EUR250 million in capital expenditures; and
-- About EUR100million-EUR200 million in shareholder distributions (including a likely EUR110 million final dividend in April 2013).
Cash flows are not seasonal, as most customers pay monthly fees by direct debit. In addition, we anticipate comfortable headroom under financial covenants in the near future. A large amount of senior debt matures in 2017-2018.
The issue rating on the EUR750 million senior secured notes issued by the special-purpose vehicle (SPV) Ziggo Finance B.V. (not rated) is ‘BBB-', two notches above our corporate credit rating on Ziggo. The issue rating reflects the recovery rating of ‘1’, assigned to SPV term loan E, indicating our expectation of very high (90%-100%) recovery for lenders in the event of a payment default.
The issue rating on the EUR1.2 billion senior notes is ‘BB-', one notch below our corporate credit rating on Ziggo. The recovery rating on these notes remains a ‘5’, indicating our expectation of modest (10%-30%) recovery in the event of a payment default.
To determine recoveries, we simulate a hypothetical default scenario. We believe that a default would most likely result from excessive leverage after a sustained period of operating underperformance. We have revised our hypothetical year of default to 2017 from 2015, given the conversion into equity of shareholder loans that previously matured in 2015, triggered by an inability to refinance senior secured debt facilities maturing in 2017.
We value the group as a going concern, given Ziggo’s resilient and profitable utility-like cable TV operations in the Netherlands, its satisfactory business risk profile, valuable cable network and customer base, and high barriers to entry in the consolidated cable industry.
At our current simulated hypothetical point of default in 2017, we envisage EBITDA will have declined to about EUR470 million and estimate the company’s stressed enterprise value at about EUR2.7 billion.
With regard to the pass-through transaction, although we have not assigned a recovery rating to the senior secured notes, we believe that recovery prospects for these notes are intrinsically linked to the recovery prospects on the senior secured term loan E. We base this view on the assignment of rights granted to noteholders under the SPV tranche facilities.
The stable outlook reflects our view that Ziggo will maintain its solid market positions, consistently generate robust free cash flows, and not deviate from its stated financial policy guidelines. We base the ratings on our forecast that the adjusted debt-to-EBITDA ratio will remain at less than 4x, free cash flow to debt at about 10%, and EBITDA interest cover higher than 4x.
Rating downside could occur if Ziggo’s financial policy became more aggressive than we currently expect.
Rating upside seems remote at this stage, given the combination of continued private equity sponsor control and our view of a related aggressive financial policy, including management’s target for debt leverage.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011