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Fitch Assigns UPC 'BB-' Rating; Outlook Stable
December 7, 2016 / 10:52 PM / a year ago

Fitch Assigns UPC 'BB-' Rating; Outlook Stable

(The following statement was released by the rating agency) LONDON, December 07 (Fitch) Fitch Ratings has assigned UPC Holding BV a Long-Term Issuer Rating (IDR) of 'BB-', with a Stable Outlook. We have also assigned instrument ratings of 'BB'/'RR3' to the group's secured debt and 'B'/''RR6' to the group's unsecured notes. A full list of rating actions is at the end of this commentary. UPC's ratings take into account the company's diversified portfolio of cable operations, sound underlying cash flow and leverage. In Switzerland, the group's largest market, UPC faces an incumbent that has invested well in fibre; we believe Swisscom's domestic market position is stronger than some of its European peers. We expect UPC's free cash flow (FCF) margin over the next few years to remain in low-double digit percentages, which is consistent with the rating. The cable footprint in the countries UPC operates in is more fragmented than in some of parent company, Liberty Global's (LG) other businesses. This may lead to a higher incidence of bolt-on acquisitions. KEY RATING DRIVERS Resilient Cash flow, Leverage The business model and UPC's established market positions provide good visibility over the consistency of earnings and cash flow. Funds from operations (FFO) adjusted net leverage is forecast at around 4.8x over the medium term, with limited headroom at the current rating level. Liberty Global's decision to fund the recently announced Multimedia Polska (MMP) acquisition from available liquidity within the Liberty Global's (LG) group underlines Fitch's assumption that leverage at UPC is likely to be managed in line or below historic levels. Diversified Operations UPC's operations in Switzerland and Austria account for roughly 70% of operating cash flow, while Poland represents the largest of the CEE countries accounting for around a further 13%-14% of cash flow (before the MMP acquisition). These markets are competitive, with Swisscom considered a progressive and well managed incumbent. UPC has established triple-play businesses in each of its markets and is providing convergent services with mobile based on mobile virtual network operator (MVNO) agreements in Switzerland, Austria nd Hungary. Its competitive positions are well established and the group is typically positioned as the number two player in its markets. Switzerland, a Competitive Market UPC benefits from broadband speed advantage given speeds deliverable via DOCSIS technologies in Switzerland, where Fitch estimates the company's national broadband subscriber market share stood at around 21% at 3Q16 (37% in- footprint). Although UPC's TV business has been under pressure, UPC enjoys wider LG group benefits which include a consistent approach to innovative video, high speed broadband, procurement and cost efficiencies. With convergence growing in importance, we regard the market environment as competitive. Underlying trends in 9M16 suggest UPC is responding well to these pressures. Position in Austria UPC's coverage of around 36% of the population in Austria, and national broadband share of 22% at 3Q16, suggests a relatively strong challenger position. UPC has reported stable to improving operating metrics in recent quarters, including ARPU and revenue generating units per subscriber (RGU/sub). In Fitch's view the market structure and strength of UPC's business, are important for the overall business profile; CEE, New Build Programme, M&A UPC's Central and Easter European (CEE) operations are spread broadly across the region, the largest being in Poland. CEE cable markets are more fragmented and usually less built out than in western Europe. UPC's operating metrics, with an RGU/sub in many cases exceeding 2.0x, suggest established and strong market positions including in broadband. However, the fragmented nature of these markets mean its competitive position in CEE is likely to be less entrenched than in some of LG's other European markets. Convergence is considered less important although this could change over time and market fragmentation may give rise to ongoing M&A. UPC is expected to continue building out new cable homes. LG is targeting to build 1.35m new cable homes in Europe in 2016; including 600,000 homes in CEE markets. This is likely to keep capex and sales levels somewhat high. Instrument Ratings and Recoveries Fitch applies a generic approach to recoveries in the case of 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 revenues, which are concentrated in countries with recovery caps of Group C or D, recoveries are capped due to domicile 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 two down from the IDR. DERIVATION SUMMARY UPC performs well relative to leveraged European telecoms peers, delivering consistently strong physical performance measures, high margins and solid cash flow. Fitch views revenue and cash flow visibility to be sound. Leverage is consistent with similarly rated peers and cash flow strong relative to the peer group. However, the fragmented nature of these markets mean its competitive position in CEE is likely to be less strong than in some of LG's other European markets. We assume that leverage at UPC is likely to be managed in line or below historic levels over the medium term, leaving limited headroom at the current rating level. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for UPC include: - Low single-digit revenue growth between 2016-2018 reflecting competitive pressures in mature markets, compensated by stronger organic growth in the CEE operations; - EBITDA margin to remain largely stable in 2016-2018; - Cash taxes to rise steadily reflecting earnings growth and the materiality of the Swiss operations to overall earnings; - Capex in the region of EUR600m per year, marginally higher in 2016-17 given a focus on new build, in CEE; reducing thereafter due to lower vendor finance related capex; - Modest bolt-on acquisition spend in 2016-2017 in line with 2015. Footprint expansion through acquisition of small operators; - The Multimedia Polska acquisition effective on a pro-forma basis from 2017; - Available cash up-streamed through shareholder loan payments subject to covenant headroom and Fitch's assumption that leverage is likley to remain lower at UPC than in other LG credit pools. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to positive rating action include: - FFO-adjusted net leverage of 4.3x or below on a sustainable basis; - Significant improvement in pre-dividend FCF. Future developments that may, individually or collectively, lead to negative rating action include: - FFO-adjusted net leverage above 4.8x on a sustainable basis. - Material deterioration of competitive position in key markets. LIQUIDITY Sound Liquidity Liquidity is provided by undrawn bank lines. The group has a EUR990m senior secured revolving credit facility due 2021 which was undrawn at September 2016 and reported availability expected at 3Q16 of EUR742m. Underlying cash flow generation is strong although cash payments to parent company, LG, may keep leverage stable around the current level, rather than the business deleverage organically which might otherwise be the case. FULL LIST OF RATING ACTIONS UPC Holding BV Long-Term Issuer Default Rating (IDR): 'BB-'/Stable Outlook assigned UPC Financing Partnership Secured RCF: 'BB'/'RR3' assigned UPCB Finance IV Limited Senior secured notes: 'BB'/'RR3' assigned UPCB Finance IV Limited Senior secured bank debt: 'BB'/'RR3' assigned UPCB Finance VI Limited Senior secured notes: 'BB'/'RR3' assigned UPC Financing Partnership Senior secured bank debt: 'BB'/'RR3' assigned UPC Holding BV Senior notes: 'B'/'RR6' assigned Contact: Principal Analysts Alexander Cherepovitsyn, CFA Analyst +44 20 3530 1755 Brendan Condon Director + 44 203 530 1599 Supervisory Analyst Stuart Reid Senior Director +44 20 3530 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Damien Chew, CFA Senior Director +44 20 3530 1424 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: 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. Fitch applies a 9 times operating lease multiple in arriving at lease adjusted debt, reflecting the importance of Switzerland to group cash flows. Please see Main Analytical Adjustments in the Criteria for Rating Non-Financial Corporates, published 27 September 2016. 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. 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