December 20, 2017 / 5:44 PM / a year ago

Fitch Affirms UPC at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, December 20 (Fitch) Fitch Ratings has affirmed UPC Holding BV's (UPC) Long-Term Issuer Default Rating (IDR) at 'BB-'. The Outlook is Stable. A full list of ratings is at the end of this commentary. UPC's ratings take into account the company's solid business profile with cable operations spread across seven countries, consistent and visible revenue and cash flow and leveraged balance sheet. Switzerland, the largest of the group's businesses, is experiencing constrained growth due to intense competition. With effective FX hedging in place, business diversification is viewed positively by Fitch. Liberty Global is likely to maintain leverage close to UPC's downgrade rating threshold but consistent cash flow generation provides good potential deleveraging capacity. KEY RATING DRIVERS Switzerland, Low-Growth, Competitive Market: Switzerland is the portfolio's single largest market, accounting for around 47% of 9M17 revenue and is therefore an important driver of the overall business. Switzerland is a mature broadband market (penetration is above 90%) and has proven to be a progressive and highly competitive telecoms market. UPC's fixed operations are pitched against a strongly performing incumbent, Swisscom as well as other fixed and mobile providers such as Sunrise. UPC's Swiss revenue was down 0.7% in 9M17; an anomaly for a cable business more typically used to enjoying challenger-type growth. Portfolio diversification across central and eastern Europe (CEE) is nonetheless strong and consolidated cash flow margins healthy. CEE, Growth and Diversification: UPC is present in five CEE countries, the largest of which, Poland, accounts for around 14% of group revenue (9M17), followed by Hungary with a further 10%. These businesses exhibit stronger revenue growth, which is more consistent with challenger-type cable operations where market share can be gained at the expense of the incumbent and through new home network build. Portfolio diversification, growth potential and the consistent margin performance of the CEE operations is a credit positive. The overall business is performing well; while diversification more generally provides portfolio management levers and the potential for disposals or minority spin-offs in times of leverage or liquidity pressure. Multimedia Polska Acquisition, Ratings Accretive: The MMP acquisition announced in 2016 has yet to be completed, following regulatory delays. Management expect the transaction to close in 1H18, increasing's UPC's cable coverage in Poland to roughly 30% of households from 20%. Funding for the transaction is being provided by parent, LG and will add around EUR80 million-EUR85 million in EBITDA to consolidated results. A transaction that is effectively equity-funded at the UPC level is expected to provide around 0.2x-0.3x of annualised leverage relief/headroom upon completion. Well-Hedged Debt Portfolio: Operations in seven underlying trading currencies could otherwise lead to currency mismatch. UPC issues debt in USD, euro and CHF; weakness in the portfolio's trading currencies versus its debt mix could therefore add to leverage. UPC's treasury strategy is to fully hedge this mismatch, effectively matching the debt portfolio's currencies with its underlying trading currencies through the use of cross currency swaps. UPC matches debt equivalent to roughly 5x budgeted EBITDA per country. Fitch views the group's hedging as well- managed and effective, insulating the group from unexpected FX movements. Rating Sensitivity Widened: Fitch has relaxed its leverage downgrade sensitivity for UPC to 5.0x from 4.8x, which if sustained would likely result in a downgrade to 'B+'. In Fitch's view, UPC benefits from solid financial metrics, a healthy growth profile, diversification from the CEE operations, effective treasury management (including currency mismatch of liabilities hedged to maturity) and a more cautious leverage than exists in other LG portfolio assets. FCF metrics are weaker than LG's best performing assets, largely due to new build capex and the centralised vendor financing role that UPC has traditionally played. Fitch nonetheless views its business and financial strengths as consistent with UPC's 'BB-' rating and strong enough to support a slightly higher leverage at this rating. Instrument Ratings and Recoveries: Fitch applies a generic approach to recoveries for UPC (refer to 'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers', dated 21 November 2016 available on The capital structure is similar to those across the LG group portfolio, with the business financed largely by senior secured debt and a smaller layer of unsecured debt. Given the mix of revenue, which is concentrated in countries with recovery caps of Group C or D, recoveries are capped at 'RR3' for the secured debt, which is rated 'BB', one notch above the IDR. Recoveries on unsecured debt achieve an 'RR6' recovery and the instruments at 'B' are notched down twice from the IDR. DERIVATION SUMMARY UPC's ratings are positioned solidly within the leveraged telecom peer group; with immediate peers being other LG cable operations - Virgin Media Inc, Telenet Group Holding N.V (both BB-/Stable) and Unitymedia GmbH (B+/Stable). VodafoneZiggo Group B.V (BB-/Negative) of the Netherlands, a joint venture between LG and Vodafone is a further benchmark. Relative to the peer group, UPC is smaller, to some extent exposed to emerging market risk, its markets more fragmented and the business delivering weaker FCF. Business diversification, growth prospects and the effectiveness of its FX policy provide mitigation. Fitch has nevertheless set UPC's downgrade threshold marginally tighter than the peer group to reflect these constraints. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Low-single digit revenue growth (excluding acquisitions) in 2017-2020, reflecting competitive pressures in mature, highly penetrated markets, alleviated by continued stronger organic growth in the CEE regions; - EBITDA margins (excluding acquisitions) to remain largely stable in 2017-2020; - Cash taxes to rise steadily, reflecting earnings growth and the materiality of the Swiss operations to overall earnings; - A reduction in the capex/sales ratio, reflecting a decline in the number of new builds in the CEE region from 2017 onwards and lower vendor financing-related capex; - Modest bolt-on acquisition spend in 2017-2020, in line with 2016. Footprint expansion through acquisition of small operators; - The Multimedia Polska acquisition effective on a pro-forma basis from 2018, EBITDA synergies expected from 2018; - Available cash up-streamed through shareholder loan payments subject to covenant headroom and Fitch's assumption that leverage is likely to remain lower at UPC than in other LG portfolio companies. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -FFO-adjusted net leverage of 4.3x or below on a sustained basis. -Significant improvement in pre-dividend FCF. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -FFO-adjusted net leverage above 5.0x on a sustained basis. -Material deterioration of competitive position in key markets. LIQUIDITY Healthy Liquidity: The company has access to a fully undrawn UPC Holding Bank Facility of EUR990 million and we' expect positive FCF from 2017-2020. Cash flow generation is therefore strong but future distributions made to LG may restrict deleveraging capacity, keeping leverage around its current level. FULL LIST OF RATING ACTIONS UPC Holding BV Long-Term IDR: affirmed at 'BB-'; Outlook Stable Senior notes rating: affirmed at 'B'/'RR6' UPC Financing Partnership Senior secured debt rating: affirmed at 'BB'/'RR3' UPCB Finance IV Limited Senior secured debt rating: affirmed at 'BB'/'RR3' UPCB Finance VII Limited Senior secured debt rating: affirmed at 'BB'/'RR3' UPC Broadband Holding B.V. Senior secured debt rating: affirmed at 'BB'/'RR3' Contact: Principal Analyst Tom Steabler Associate Director +44 20 3530 1661 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 +44 20 3530 1424 Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: Summary of Financial Statement Adjustments Fitch applies a 9x operating lease multiple in arriving at lease adjusted debt, reflecting the importance of Switzerland to group cash flows. See Main Analytical Adjustments in the Corporate Rating Criteria, published 7 August 2017. Additional information is available on 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 Corporate Rating Criteria (pub. 07 Aug 2017) here Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Exposure Draft: Corporate Rating Criteria (pub. 14 Dec 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here 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. 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