TEXT - Fitch may cut Virgin Media Inc issuer default rating
Feb 6 - Fitch Ratings has placed UK cable operator Virgin Media Inc.'s (Virgin Media) 'BB+' Long-term Issuer Default Rating (IDR) on Rating Watch Negative (RWN). A full list of rating actions is below. The RWN follows the announcement by Liberty Global, Inc (LGI) and Virgin Media that subject to shareholder and regulatory approvals, LGI will acquire Virgin Media in a stock and cash merger. As a result of debt from acquisition financing being pushed down to Virgin Media upon closing of the transaction, Fitch expects the company's 2012 proforma net debt/EBITDA will increase to 4.3x from 3.3x. KEY DRIVERS - Two to Three Notch Downgrade Expected Fitch expects to downgrade Virgin Media's Long-term IDR by two to three notches upon completion of the transaction, due to the expectation of higher leverage. We would expect Virgin Media's future financial policies to be similar to that at other LGI subsidiaries, such as Telenet N.V. ('B+'/Stable), where shareholder distributions could see leverage rising to 5.0x. - Good Recovery Prospects Recovery prospects for Virgin Media bondholders are good, in Fitch's view, given the solid operational profile of the business. Based on the proposed transaction structure with around GBP6.1bn of senior secured debt and finance leases, we would expect to downgrade the rating of the company's senior secured bonds to 'BB+' (currently 'BBB-') and the senior unsecured rating to 'BB-' (currently 'BB+'), if Virgin Media's Long-term IDR was downgraded by two to three notches. This initial assessment might change depending on the final mix of secured/unsecured debt in Virgin Media's capital structure upon deal closing and is contingent upon receipt of final documents confirming information already received by Fitch. - Solid Operational Profile Virgin Media's 2012 results show that the company's operating and financial results are in line with Fitch's forecasts. Over the medium term, we expect Virgin Media to deliver increasing operating free cash flow, despite slowing customer and revenue growth. This is underpinned by the company's key strength as a "second-incumbent" in the UK, with its superior network infrastructure and strong market share within its geographical footprint. WHAT COULD TRIGGER A RATING ACTION? Negative: - Two to three notch downgrade on the completion of acquisition of Virgin Media by LGI, leading to net debt/EBITDA approaching 4.5x. Positive: Positive rating action is currently not anticipated. LIQUIDITY AND DEBT STRUCTURE Virgin Media ended 2012 with GBP206m in cash. The proposed transaction is complex and the amount of debt to be repaid and the final mix of bank, secured and unsecured bond debt is still unclear. FULL LIST OF RATING ACTIONS Long-term IDR: 'BB+' placed on RWN Short-term IDR: affirmed at B Virgin Media Investment Holdings senior secured bank facilities 'BBB-' placed on RWN Virgin Media Secured Finance Plc 2018 and 2021 senior secured bonds 'BBB-' placed on RWN Virgin Media Finance Plc 2016 and 2019 senior notes 'BB+' placed on RWN Fitch may have provided another permissible service to the rated entity or its related third parties. Details of this service can be found on Fitch's website in the EU regulatory affairs page.
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