Fitch Affirms KDG at 'BB', Outlook Stable

Fri Mar 15, 2013 10:32am EDT

(The following statement was released by the rating agency) MOSCOW/LONDON, March 15 (Fitch) Fitch Ratings has affirmed Kabel Deutschland Vertrieb and Service GmbH's (KDG) Long-term Issuer Default Rating (IDR) at 'BB' with a Stable Outlook. KDG's senior secured debt has been affirmed at 'BB+'. KDG is an established cable provider in Germany with growing broadband, telephony and premium/pay-TV franchise. Its operating profile is potentially consistent with a low investment grade rating. This is overlaid by its relatively high leverage, particularly on a lease-adjusted basis, and shareholder friendliness. KEY RATING DRIVERS Stable TV Business: KDG benefits from a stable basic TV subscriber base that generates almost utility-type revenue. This has been enhanced by the company's expansion into the premium/pay-TV segment with a positive impact on average revenue per user. The cable industry's share in TV distribution in Germany has been relatively stable for many years at around 50% and is unlikely to come under significant pressure. Strong Broadband Growth: KDG has experienced strong broadband growth. The cable industry has accounted for a dominant share in new subscriber additions in Germany since end-2009. A combination of super-fast broadband speeds, not achievable by peers, and moderate pricing provides a window of opportunity to make deep inroads into competitors' market shares. Solid Network Infrastructure: Where upgraded to Docsis 3.0 standard, KDG's cable network is currently capable of delivering super-fast speeds of 100 megabits per second, turning the company into a strong facilities-based internet broadband provider, ahead of the telecoms incumbent in many areas. However, Docsis3.0 upgrades are taking longer than initially projected. The announced EUR300m of accelerated capex suggests that certain other urgent infrastructure upgrades are necessary. Mature Markets: KDG's key markets are relatively mature. It entered the broadband segment relatively late and may struggle to increase its market share to the level held by higher rated peers such as Virgin Media Inc ('BB+'/Stable). Carriage Fees Under Threat: Public broadcasters refused to pay annual carriage fees that generated EUR27m of annual revenues for KDG. This potential loss would not infringe a significant financial blow to KDG financials. However, it may lead to a review of carriage relationships with private TV companies, putting more carriage fees at risk. Shrinking carriage revenues may put pressure on KDG's margins, but unlikely to lead to a negative rating action. Strong Margins and FCF: KDG's EBITDA margin is strong - 45.2% in the financial year ended 31 March 2012 (FY12) - and has been improving, due to larger scale. We believe that content costs are likely to start rising stalling further improvements. The company's pre-dividend free cash flow (FCF) margin averaged 11.3% for FY11 and FY12 which is strong for its rating category. A planned EUR300m of accelerated capex in 2013-2014 would temporarily pressure this but Fitch estimates that pre-dividend FCF generation should remain positive. Shareholder Friendliness: The company is likely to remain shareholder friendly, diverting free cash to dividends and share buybacks. Deleveraging to significantly below the upper level of the targeted range of between 3.0x and 3.5x net debt/EBITDA is unlikely, unless the company commits to a tighter leverage target. Low Refinancing Risks: After the successful refinancing of a EUR600m bridge loan in June-July 2012, KDG does not face any material debt redemptions until December 2016. RATING SENSITIVITIES KDG's operating profile is potentially consistent with a low investment grade rating. This is overlaid by its relatively high leverage, particularly on a lease-adjusted basis, and shareholder friendliness. A rise in leverage to above 3.8x net debt/EBITDA and FFO adjusted net leverage to above 4.75x on a sustained basis would put negative pressure on ratings. Improvements in pre-dividend FCF generation on the back of stable operating performance may be rating positive. A tighter leverage target of below 3x net debt/EBITDA and/or significant reduction in lease-adjusted debt would put positive pressure on the ratings. Contact: Principal Analyst Brian O'Brien Analyst +44 20 3530 1127 Supervisory Analyst Nikolai Lukashevich, CFA Senior Director +7 495 956 9968 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Committee Chair Mike Dunning Managing Director +44 20 3530 1178 Media Relations: Mark Morley, London, Tel: +44 203 530 1526, Email: mark.morley@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. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable criteria, 'Corporate Rating Methodology', dated 08 August 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research Corporate Rating Methodology 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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