December 7, 2016 / 10:52 PM / 8 months ago

Fitch Assigns Ziggo a Rating of "BB-"; Outlook Stable

(The following statement was released by the rating agency) LONDON, December 07 (Fitch) Fitch Ratings has assigned Ziggo Group Holding BV (Ziggo) a Long-Term Issuer Default Rating (IDR) of 'BB-', with a Stable Outlook. At the same time, the agency has assigned instrument ratings of 'BB+'/'RR1' to the group's secured debt and 'B'/'RR6' to its unsecured notes. A full list of rating actions is at the end of this commentary. Ziggo's ratings are supported by its strong underlying operating profile and solid and stable free cash flow (FCF) generation. A good competitive position has been built on its fully upgraded network with near-nationwide coverage. The Dutch telecoms market is consolidating to a smaller number of larger players. The proposed JV with Vodafone (VOD) enhances the operating profile and is likely to support more rational market pricing. Operational challenges following the merger with UPC Netherlands continue to affect Ziggo's financial performance. Fitch expects leverage at end-2016 and end-2017 to be higher than the 5.2x FFO adjusted net leverage guideline at 'BB-'. Customer attrition is slowing and we expect financial performance to stabilise, which should lead to Ziggo deleveraging to 5.1x by end-2018. KEY RATING DRIVERS Operational Challenges, Competitive Position Ziggo's operational and financial performance was somewhat weak in 2015 and 9M16 - pro forma revenue (for the merger with UPC Netherlands) declined by 2.4% in 2015, with a further 2.0% fall reported in 9M16. This has been due to intense competition, mainly from an incumbent that has invested in fibre and improved its service offering, and the difficulty in merging Ziggo with the former UPC Netherlands. The challenges of integrating two large regional cable networks, sales and customer services and rolling out a common brand, channel line-up and product offer have led to customer dissatisfaction and heightened customer attrition. We believe management is addressing customer concerns and this will gradually stabilise operating trends. Features such as multiscreen (Horizon Go), linear catch-up (Replay TV) and a new WiFi router (Connect Box) offering consumer speeds of up to 300Mbps reflect the product development benefits of being part of the wider Liberty Global (LG) group. This ownership brings scale benefits and financial and operational expertise. Notwithstanding Ziggo's integration challenges, LG has a strong track record of managing cable businesses. Ziggo's upgraded cable network, a broadband market share comparable to the incumbent, and the prospect of combining with VOD Netherlands underpin a strong operating and competitive position. Vodafone JV, Market Structure, Convergence We do not expect Ziggo's ratings to be significantly affected by the proposed merger with VOD's mobile operations in the Netherlands. The terms of the transaction and preliminary regulatory clearance imply a high likelihood the JV will happen. A combination with VOD's Dutch mobile operations is expected to enhance Ziggo's operating profile; the JV will be the leading fixed-mobile convergent challenger in the Netherlands and will hold market-leading positions in both fixed and mobile. It will have roughly 92% fixed network coverage, a comparable broadband market share to the incumbent, including leadership in the consumer segment, and a strong number-two mobile position - Fitch estimates VOD to have had roughly a 33% mobile service revenue share at 3Q16. The JV will be a stronger challenger to KPN, an incumbent that has invested in fibre and that, in Fitch's view, has developed a strong multi-play business, proving to be one of the more progressive incumbents operationally among peers. A more balanced competitive landscape is likely to support rational market behaviour, although the two remaining mobile operators could still be disruptive. Across Europe, convergence is proving important in managing customer churn - the Ziggo/VOD JV and KPN should enjoy a strong competitive advantage relative to other operators in the market. Fitch will need to consider initial leverage in the structure, as well as any impact from operating leases and cash taxes. These factors have the potential to widen the gap between net debt/EBITDA and FFO adjusted net leverage. More detailed analysis of the JV's credit metrics and an impact on the ratings will be completed when the JV releases more financial information following completion of the merger. Instrument Ratings and Recoveries Fitch applies a generic/aggregate approach to recoveries in the case of Ziggo - please refer to our criteria, Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers, published 21 November 2016. The capital structure is similar to those present across the LG group portfolio, with the business financed largely by senior secured debt and a smaller layer of unsecured debt. Leverage metrics are distorted by Ziggo's recent EUR3.1bn equivalent bond issuance, which Fitch expects to be used partially to refinance bank debt, and mainly to fund a distribution to shareholders once the VOD JV is completed. The depth of network coverage and other operational strengths imply strong post-distress recoveries for secured investors, with secured debt assigned an 'RR1' recovery rating and an instrument rating two notches above the IDR at 'BB+'. Unsecured debt has been assigned an 'RR6' recovery rating and the instrument rating notched two down from the IDR, at 'B'. DERIVATION SUMMARY Ziggo's ratings are underpinned by a solid operating profile, which will strengthen following the closing of the Vodafone JV. The business faces ongoing integration challenges and relatively weak financial metrics for the rating, including high leverage. The company's closest peers - Virgin Media Inc. and Telenet N.V. (both BB-/Stable) - offer some similar characteristics in terms of business and market profile, but are performing more strongly operationally and exhibit lower leverage. Given the benefits of a common shareholder - which include an integrated approach to technology and business strategy - Fitch expects Ziggo's commercial performance to stabilise and leverage to converge over the medium term with that of Virgin Media and Telenet. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer (excluding the announced merger with Vodafone Netherlands) include: - Low single-digit revenue decline in 2016-2017, stabilising by 2018 and modest growth thereafter - EBITDA margin improving to 56% in 2017, stable in 2018 and 2019 - Accrual capex/sales of 21% in 2016, reducing to around 19% by 2018 - Shareholder distributions and payments to LG reflecting available FCF, balanced with gradual deleveraging with Fitch-defined net debt/EBITDA reducing to 5.0x by end-2018 (5.4x at end-2015) RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: - 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 Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Failure to reduce FFO adjusted net leverage to below 5.2x by end-2018 (5.5x at end-2015) on a sustainable basis - Further deterioration in competitive pressures and inability to show recovery in operational performance LIQUIDITY Liquidity is provided by undrawn bank lines - the group has an EUR800m RCF due 2020 which was undrawn at September 2016, although only EUR8m is available subject to 3Q16 compliance reporting. Underlying cash flow generation is strong, although Fitch expects available cash to be upstreamed to shareholder(s), subject to agreed leverage policy. FULL LIST OF RATING ACTIONS Ziggo Group Holding BV Long-Term Issuer Default Rating (IDR): 'BB-'/Outlook Stable assigned Ziggo B.V. Secured Bank Debt/Secured Notes: 'BB+'/'RR1' assigned Ziggo Secured Finance B.V. Secured Bank/Secured Notes: 'BB+'/'RR1' assigned Ziggo Secured Finance Partnership Secured Bank Debt: 'BB+'/'RR1' assigned LGE HoldCo VI B.V. Senior Notes: 'B'/'RR6' assigned Ziggo Bond Finance B.V. Senior Notes: 'B'/'RR6' assigned Contact: Principal Analyst Alex Cherepovitsyn, CFA Analyst +44 20 3530 1755 Brendan Condon Director + 44 20 3530 1599 Supervisory Analyst Stuart Reid Senior Director +44 20 3530 1085 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Damien Chew, CFA Senior Director/Head of TMT +44 20 3530 1424 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Summary of Financial Statement Adjustments Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor must be disclosed (in bullet points). Analysts should refer to the relevant section of the Data Control Form and discuss and agree the proposed disclosure at the rating committee. This disclosure should appear after the analyst contact information. Additional information is available on www.fitchratings.com. 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