May 11, 2017 / 3:09 PM / 8 months ago

Fitch Affirms Virgin Media at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 11 (Fitch) Fitch Ratings has affirmed Virgin Media Inc.'s (VMED) Long-Term Issuer Default Rating (IDR) at 'BB-'. The Outlook is Stable. Its Short-Term IDR is affirmed at 'B'. All associated instrument ratings have been affirmed at the existing levels. A full list of rating actions is at the end of this comment. Virgin Media's (VMED) ratings are supported by its consistent financial performance, well-developed and stable operating profile, and a competitive, advanced but rational UK broadband/fixed line market - particularly within its most important consumer segment. TV content cost pressures are being managed, helped by the company's access to the widest available range of content in the UK and agnostic approach to content access. The technological advantage of cable and the company's broadband-led business strategy further support the ratings. VMED's strong physical metrics and underlying cash flow support leverage which in Fitch's view is likely to remain close to its ratings threshold, with the business expected to continue to make sizeable shareholder payments to support Liberty Global's (LG) share buyback programme. KEY RATING DRIVERS Solid Physicals, Visible Financials: VMED consistently delivers improvements in physical metrics eg net customer additions, services per customer (revenue generating units per customer) and average revenue per user (ARPU). This is in spite of the maturity of the UK market. Triple-play penetration of the customer base is advanced - 62% at end-2016- but Fitch believes scope remains to improve this metric. Convergence trends in the UK offer further support, although quad-play is most important from a churn management perspective. Fitch views VMED as having one of the most visible revenue and underlying cash flows in the European telecoms portfolio, which is supportive of a relatively high financial leverage. Well Positioned in a Competitive Market: The UK, VMED's most important market, is competitive but rational. This is particularly the case in fixed, by far the most important area for the cable operator. Fixed telephony has proven far more defensive than mobile, with the market consistently pushing through price rises. Consumer revenues in the incumbent's fixed operations are growing strongly, while Sky continues to post mid-single-digit growth helped by its telecoms offer, echoing the performance at VMED. VMED is well positioned: Fitch estimates it is the in-franchise broadband market leader while based on Ofcom data its end-2016 national share of broadband lines was 19.5%. Lightning to Ramp over 2017/2018: VMED's plan to connect an additional 4 million UK homes to its two-way network by 2019-20 has so far (ie at end-2016) added 567,000 homes; a number that was restated following initial year end reporting. Other physicals - penetration, ARPUs and build costs are reported to be within management's targets. It is possible the build profile will take longer than initially thought given the complexity of such a project. The broad parameters remain intact and in Fitch's view, incremental revenue and cash-flow targets seem reasonable. Investment will compress near term free cash flow; longer term benefits are clear and investment likely to be flexible. Cable's Technological Advantage: Cable is likely to retain its broadband speed advantage. VMED is currently offering commercial download speeds of up to 300 Mbps, while the incumbent's most widely available commercial offer provides speeds of up to 76 Mbps. The incumbent's technology roadmap is closing the gap. technology is expected to enable broadband speeds of up to 500 Mbps, its targets including covering 10 million homes by 2020. BT Group is also targeting 2 million homes with fibre to the premise. DOCSIS 3.1 cable technology nonetheless is capable of delivering 1 Gbit speeds, is deliverable today and likely to be rolled out across all of LG's European cable assets. Leverage, Shareholder Distributions: FFO net leverage has been managed around 5.0x in recent years (5.1x in 2016), and in Fitch's forecasts likely to remain around these levels over the medium term given the cash-flow pressures of Project Lightning and the sizeable shareholder payments VMED makes to parent company LG. This is likely to provide little headroom to our ratings threshold of 5.2x. The importance of VMED's cash flow to the LG group is evident in the GBP1.5 billion shareholder payment in 2016. The overall contribution VMED makes to the LG consolidation provides a certain amount of leverage discipline given's LG's upper net debt /EBITDA threshold of 5.0x. DERIVATION SUMMARY VMED's ratings are underpinned by its strong operating profile, a developed but rational UK convergent market, technological advantage and broadband-led business strategy. The company's closest peers include fellow Liberty Global owned cable operators, Telenet N.V, UPC and VodafoneZiggo (each rated BB-/Stable) - with Telenet arguably its closest peer given the developed stage of their respective business strategies and strong competitive position in their markets. Talktalk is also rated 'BB-'/Stable, but its weaker competitive position in the UK telecoms market means that leverage thresholds are much tighter. The deleveraging capacity provided by VMED's underlying free cash flow and strong operating profile would allow for a higher rating if leverage was lower on a sustainable basis. No Country Ceiling, parent/subsidiary or operating environment aspects impacts the rating KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - revenue growth of around 6%-7% overs over the next few years driven by Project Lightning and some price increases; - modest EBITDA margin expansion from 45% in 2016 to 48% in 2020 due to benefits of economies of scale as Project Lightning is completed; - capital intensity (property & equipment additions including those funded through vendor finance as a percentage of revenue) to remain elevated at around 28-33% over 2017-2019 before reducing as Project Lighting completes; - FFO net leverage to be maintained at the higher end of range of 4.5x-5.0x through cash repatriation / repayment of parent company loans. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - A firm commitment by Virgin Media that the company is adopting a more conservative financial policy (for example, FFO adjusted net leverage of 4.5x) could lead to positive rating action - Continued sound operational performance, as evidenced by key performance indicator (KPI) trends and progress in both investment and consumer take-up with respect to Project Lightning Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - FFO adjusted net leverage that was expected to remain above 5.2x on a sustained basis - FFO fixed charge cover that was expected to remain below 2.5x on a sustained basis - Material decline in operational metrics, such as customer penetration, revenue generating units per subscriber and ARPU. Evidence that investment in Project Lightning is being scaled to proven demand will be an important driver LIQUIDITY Sufficient Liquidity Profile: Fitch considers liquidity sufficient with unrestricted cash and cash equivalents of GBP22 million forecast positive FCF and full availability under its GBP675 million revolving credit facility as at FYE16. LG manages liquidity across its credit pools on a flexible basis and would be expected to provide support/reduce shareholder payments from VMED if necessary. FULL LIST OF RATING ACTIONS Virgin Media Inc. -- Long-Term IDR: Affirmed at 'BB-'; Outlook Stable -- Short-Term IDR: affirmed at 'B' Virgin Media Secured Finance Plc -- Senior secured debt rating: affirmed at 'BB+','RR1' Virgin Media Investment Holdings Limited -- Senior secured debt rating: affirmed at 'BB+','RR1' Virgin Media SFA Finance Limited -- Senior secured debt rating: affirmed at 'BB+','RR1' Virgin Media Finance PLC -- Senior notes affirmed at 'B','RR6' Virgin Media Bristol LLC -- Senior secured debt rating: affirmed at 'BB+','RR1' Virgin Media Receivables Financing 1 DAC -- Receivables financing notes: affirmed at 'B+'.'RR5' Contact: Principal Analyst James Hollamby Associate Director +44 20 7530 1656 Supervisory Analyst Stuart Reid Senior Director +44 20 7530 1085 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Damien Chew, CFA Senior Director +44 20 7530 1424 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). 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