Oct 26 -
— We believe that the management of French telecom and media group Vivendi S.A. is committed to preserving our current ‘BBB’ long-term rating on the group.
— In the event of a business reshuffle, we think Vivendi would adjust its financial risk profile to balance any erosion in its business risk profile.
— Consequently, we are affirming our ‘BBB/A-2’ long-term and short-term ratings on Vivendi and removing them from CreditWatch negative, where we placed them on July 4, 2012.
— The outlook is negative, reflecting Vivendi’s rising leverage, declining EBITDA at mobile subsidiary SFR, and our uncertainty regarding Vivendi’s future business risk and financial risk profiles.
On Oct. 26, 2012, Standard & Poor’s Ratings Services affirmed its ‘BBB’ long-term and ‘A-2’ short-term corporate credit ratings on France-based telecommunications and media group Vivendi S.A. We also removed the ratings from CreditWatch, where we placed them with negative implications on July 4, 2012. The outlook is negative.
The affirmation reflects our view that Vivendi’s supervisory board and management are committed to preserving the current rating. In addition, we think the group will aim to maintain a financial risk profile commensurate with the rating and balancing any potential negative trend in its business risk profile. We continue to think that Vivendi’s previously announced strategic review may somewhat weaken its business risk profile in the future, in particular because the group could reduce business or geographic diversity. At this stage, however, we assume that Vivendi’s business risk profile will remain “satisfactory,” and that any large asset disposals would likely be accompanied by significant debt reduction and a material strengthening of the group’s financial risk profile.
Still, the negative outlook points to the risk that any future weakening of the business risk profile might be more pronounced than we can reasonably anticipate today, or not sufficiently balanced by a stronger balance sheet to preserve the current rating. In addition, in the current business configuration, we cannot rule out that ongoing price pressures at mobile subsidiary SFR would translate into a sharper EBITDA drop than we anticipate for 2013, which could lead us to lower the rating.
Our current assessment of Vivendi’s “satisfactory” business risk is underpinned by the solid market positions across its business portfolio, sound cash flow generation of its key assets, and broad business and geographic diversity. These strengths are tempered by heightened competition in the French telecom market after the recent disruptive entry of a fourth operator, its incomplete control over several subsidiaries’ cash flows, dividend leakage, and exposure to various country, currency, legal, and governance risks.
We view the individual credit quality of each of Vivendi’s businesses as within a narrow range. SFR is the stronger asset and UMG and AB Games the weaker from a credit standpoint. We factor into our assessment some benefits from the group’s business and geographic diversity. Still, we have revised downward our assessment of the SFR’s credit quality, given intense price pressures in the domestic mobile market after the disruptive entry of a fourth competitor early 2012. After a likely high single digit EBITDA drop in 2012 at group level, we now see a further low single digit EBITDA decline at SFR in 2013 compared with our previous expectation of a stabilization. Thereafter, we think that management’s aggressive cost cutting objectives should help stabilize SFR’s EBITDA margin in the mid-20% area, compared with about 30% in 2011.
Our “intermediate” financial risk assessment factors in our expectation that Vivendi’s key financial metrics will deteriorate markedly in 2012 and, barring asset disposals, weaken further in 2013, but likely remain within adequate parameters for the rating. The drop this year will stem from the combination of acquisitions, the cost to acquire fourth-generation (4G) spectrum, higher cash tax outflows because of income tax regulation changes, and lower EBITDA.
Overall, apart from any asset disposals, we anticipate that the Standard & Poor’s adjusted debt to EBITDA ratio for Vivendi will increase toward, but not exceed, the 2.5x (3.0x on a proportionate basis) maximum level we consider adequate for the rating by 2013, from 2.1x (2.5x on a proportionate basis) in 2011.
The short-term rating is ‘A-2’. We assess Vivendi’s liquidity as “adequate” under our criteria.
The ratio of liquidity sources to uses for the next 12 months was about 1.2x at end-June 2012 by our calculation. Sources included the group’s EUR7.6 billion of long-term undrawn committed lines, well spread from 2014 to January 2017; cash at group level of about EUR0.3 billion at end-June 2012, excluding the large cash balances sitting at U.S.-based subsidiary AB; and our anticipation of funds from operations (FFO) of about EUR6 billion. At this stage, we have not factored in asset disposals that European competition authorities have mandated following the GBP1.2 billion acquisition of assets from U.K.-based EMI Group PLC (EMI, not rated).
Funding requirements at end-June 2012 included EUR5.2 billion of debt maturities in the ensuing 12 months, of which EUR3.3 billion were outstanding commercial paper; about EUR3.3 billion in capital expenditures; EUR1.7 billion in dividends including those to minority shareholders; about EUR3.3 billion in capital expenditures (excluding the EUR1 billion for the 4G spectrum acquisition already cashed out in first-quarter 2012), and EUR1.5 billion of the contracted acquisitions from EMI (which was paid in July 2012) and in the Polish TV market.
We believe that Vivendi has good access to capital markets, and sound and broad bank relationships. We think that management will continue actively managing liquidity in order to keep it adequate. In May 2012, Vivendi closed a new EUR1.5 billion 2017 facility refinancing part of a EUR1.9 billion 2013 loan (of which EUR1.1 billion undrawn). In April, it carried out a EUR300 million tap issue on its 2021 bond and raised $2 billion on three U.S. bond tranches maturing in 2015, 2018, and 2022.
The continued availability of parent company credit lines is subject to Vivendi’s compliance with a single financial covenant that limits net debt to EBITDA to 3.0x on a proportionate, pro forma basis. We expect headroom under this financial covenant to remain comfortable. We understand that SFR’s lines are also subject to financial covenants, under which the headroom is large and where the calculation includes parent company loans.
We understand that the availability of the group’s bank lines is not subject to repeating material adverse change provisions.
The group has recently put in place a letter of credit to cover the liquidity risk related to the June-2012 U.S. jury verdict requiring it to pay EUR765 million in damages. The outcome of this litigation is uncertain at this stage, however, and Vivendi has said it would appeal.
The negative outlook reflects the possibility of a one-notch downgrade within the next two years if Vivendi’s business risk profile were to weaken to below the current satisfactory category, or, while remaining satisfactory, it was not sufficiently balanced by a stronger financial risk profile to sustain the current rating. Alternatively, absent any business reshuffling, a prolonged and steep EBITDA drop at SFR level could put some additional pressure on the business risk profile, adversely affect credit metrics to a larger extent than we currently anticipate, and trigger a downgrade.
We could revise the outlook to stable if we are increasingly convinced that performances of Vivendi’s telecom division will stabilize; that the group’s business risk profile remains satisfactory; and that its credit metrics will remain within adequate parameters for the rating, or, if required by a lower business risk profile, strengthen to a sufficient extent.
Related Criteria And Research
— Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
— Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
— 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
— Key Credit Factors: Business And Financial Risks In The Global Telecommunication, Cable, And Satellite Broadcast Industry, Jan. 27, 2009
Ratings Affirmed; CreditWatch Action
Corporate Credit Rating BBB/Negative/A-2 BBB/Watch Neg/A-2
Senior Unsecured BBB BBB/Watch Neg
Commercial Paper A-2 A-2/Watch Neg