December 20, 2017 / 5:39 PM / 6 months ago

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

(The following statement was released by the rating agency) LONDON, December 20 (Fitch) Fitch Ratings has affirmed Virgin Media Inc.'s (VMED) Long Term Issuer Default Rating (IDR) at 'BB-' and Short-Term IDR at 'B'. The group's senior secured, receivables financing notes and unsecured ratings are affirmed at 'BB+'/'RR1', 'B+'/'RR5' and 'B'/'RR6', respectively. The Outlook on the Long-Term IDR is Stable. A full list of rating actions can be found at the end of this commentary. The ratings take into account VMED's consistent operating performance, high quality network and well-established customer base, a competitive but rational UK fixed communications market and VMED's measured approach to content aggregation. Operating cash flow is among the strongest in the peer group, providing VMED with a deleveraging capacity that is available to few of its competitors. It also allows management to keep leverage high/ closer to Fitch's downgrade threshold than might otherwise be tolerated without pressure on its ratings. VMED is the largest European company in parent company Liberty Global plc's (LG) portfolio. Investment in Project Lightning, its 4 million new premises network build, and sizeable payments to the shareholder are expected to keep leverage towards the upper end of its target net debt/EBITDA leverage of 5.0x. KEY RATING DRIVERS Consistently Strong Operating Performance: VMED has developed as a strong second incumbent business across the UK and Ireland, its fibre coax network covering approximately 50% of the UK with significant further network build underway. Operating performance is consistently strong; the company enjoys leading in-franchise broadband market share - that part of the telecoms value chain that is generating strongest growth and economic value. The company's broadband-led commercial strategy tied to an agnostic approach to content aggregation drives consistent average revenue per user metrics, high margins and visible cash flow. Competitive but Rational Fixed Market: Competition in the UK communications market is well-developed and intense. BT Group plc (BBB+/Stable) is a progressive incumbent whose service offer has been enhanced by its investment in sports/TV content and fibre and more recently its EE mobile acquisition, while Sky plc's (BBB-/RWP) leading pay-TV business enjoys consistently strong operating metrics and revenue growth, having developed a broad communications offer including the addition of mobile. The market has proven resilient to cyclical downturns with pricing supported by demand for high-quality broadband and pay TV. Broadband-led businesses have proven particularly well positioned. Project Lightning Gaining Momentum: Project Lightning is VMED's project to extend the company's network to pass an additional 4 million UK premises, taking its network coverage to 65% of the population. VMED has a proven track record and established demand for its communications offer; Fitch therefore believes VMED's project target of developing an additional GBP1 billion of revenue once the project is fully mature to be well-founded. With close to 950,000 new homes passed at end-3Q17 the project has started to build scale, with operating metrics so far tracking management's targets. The project is expected by Fitch to keep capex high at least through 2020 and potentially beyond MVNO Might Not Be Enough: VMED is partnered with BT's EE mobile network providing mobile and quad-play services to its fixed subscriber base. Fitch believes a mobile virtual network operator (MVNO) model is appropriate to meet consumer needs at this stage. However, we are less certain service quality will be adequately supported as the market moves from a discounted bundle at present to a more nuanced convergent market where consumers demand seamless content access across multiple technology platforms. Break clauses in its MVNO contract provide a contingent should an owned infrastructure prove more necessary. Such a development would however come at a significant capital cost and the MVNO model remains our medium-term central premise. Capex, Shareholder Payments Drive Leverage: Project Lightning is budgeted at roughly GBP3 billion in incremental investment; Fitch expects the project to keep capex-to-sales in the high 20%/low 30% range through 2019. As stated the project economics appear well thought out and in Fitch's view a good use of capital. VMED is LG's largest European cable asset and strongest cash contributor. LG maintains a sizeable buyback programme and shareholder payments from VMED are therefore likely to remain high. We assume leverage will remain close to the company's upper end of net debt / EBITDA target of 5.0x (excluding vendor finance). DERIVATION SUMMARY VMED's ratings are underpinned by a strong operating profile, 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 Holding B.V (each rated BB-/Stable) and VodafoneZiggo Group B.V (BB-/Negative) . Telenet is arguably its closest peer given the developed stage of their respective business strategies and strong competitive position in their markets. The overall importance of VMED's cash flow to LG and the latter's sizeable share buyback programme imply that VMED's leverage is likely to be close to historical levels. The deleveraging capacity provided by the company's underlying free cash flow (FCF) and strong operating profile would allow for a higher rating if not for the shareholder's/VMED's stated leverage policy. No country-ceiling, or parent/subsidiary aspects impact the ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth of around 4%-7% over the next few years, driven by Project Lightning and price increases; - Modest EBITDA margin expansion over the coming years 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 in the high 20%/low 30% range over 2017-2019, before declining as Project Lighting approaches completion; and - Funds from operations (FFO) adjusted net leverage to be maintained at or close to Fitch's downgrade trigger of 5.2x 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 VMED to a more conservative financial policy (for example, FFO adjusted net leverage of 4.5x). -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 expected to remain above 5.2x (2016: 5.1x) on a sustained basis. -FFO fixed charge cover expected to remain below 2.5x (2016: 3.5x) on a sustained basis. -Material decline in operational metrics, as evidenced by declining KPIs such as customer penetration, revenue- generating units per subscriber and ARPUs. Evidence that investment in Project Lightning is being scaled to proven demand will be an important driver LIQUIDITY Sufficient Liquidity Profile: In Fitch's view the liquidity profile is sufficient on the basis of positive FCF expected during 2017-2020, full availability under VMED's GBP675 million revolving credit facility and unrestricted cash and cash equivalents at end-3Q17 of GBP42.8 million. LG manages liquidity across its portfolio on a flexible basis and would be expected to provide support to or reduce shareholder payments from VMED if necessary. Reported short term maturities at 3Q17 include approximately GBP1.7 billion of vendor financing related debt. This value however includes GBP800 million of receivable financing notes maturing 2024. Nonetheless liquidity is managed more tightly than at other LG portfolio businesses. 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 Bristol LLC Senior secured debt rating: affirmed at 'BB+'/'RR1' Virgin Media SFA Finance Limited Senior secured debt rating: affirmed at 'BB+'/'RR1' Virgin Media Receivables Financing 1 DAC Senior secured debt rating: affirmed at 'B+'/'RR5' Virgin Media Finance Plc Senior notes rating: affirmed at 'B'/'RR6' 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: adrian.simpson@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 Corporate Rating Criteria (pub. 07 Aug 2017) 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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