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RPT-Fitch downgrades Virgin Media to 'B+' on acquisition by Liberty Global; outlook stable

Mon Jun 17, 2013 5:39am EDT

June 17 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has downgraded Virgin Media Inc.'s (Virgin Media) Long-term Issuer Default Rating (IDR) to 'B+' from 'BB+'. The ratings have been removed from Rating Watch Negative (RWN) and the Outlook on the Long-term IDR is Stable. A full list of rating actions is below.

The downgrade follows the acquisition of Virgin Media by Liberty Global, Inc (LGI). Fitch expects LGI to run Virgin Media's leverage towards the higher end of a 4.0-5.0x net debt/EBITDA ratio, as it does with its other European cable subsidiaries. Total debt at closing, especially senior secured debt, is higher than Fitch initially expected, which has led to lower recovery rates than previous anticipated when Fitch put Virgin Media's ratings on RWN on 6 February 2013.

KEY RATING DRIVERS

Sharp Increase in Leverage

Gross debt to EBITDA (last 12 months) has increased to 5.2x post-acquisition from 3.6x at the end of 2012 as a result of debt from acquisition financing being pushed down to Virgin Media. Fitch expects most of the USD1.5bn of cash currently at Virgin Media to be used to redeem the company's convertible debt and for distribution to other LGI subsidiaries.

Good Recovery Prospects

Although the GBP7.2bn of senior secured debt and finance leases after closing was higher than we expected, recovery prospects for Virgin Media senior secured debt holders are still good, in Fitch's view, given the solid operational profile of the business. We have downgraded the senior secured rating of this debt to 'BB+'/RR1 from 'BBB-'. Recovery prospects for the senior unsecured bonds have suffered as a result of the increased senior secured debt. As a result, the senior unsecured rating has been downgraded to 'B-'/RR6 from 'BB+'. Further increases in senior secured debt are likely to result in lower recoveries, which could lead to a downgrade of the senior secured rating.

Changes to Holding Structure

Following the closing of the transaction, Fitch anticipates that Virgin Media's holding structure could change in the short term. This might change the parent company Fitch assigns Virgin Media's IDR to but is unlikely to impact the senior secured and unsecured ratings.

Solid Operational Profile

Virgin Media's Q113 results show that the company's operating and financial results are in line with Fitch's 2013 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.

RATING SENSITIVITIES

Negative:

- A negative rating action could occur if the company's FFO adjusted net leverage increases above 5.5x, or FFO fixed charge cover falls below 2.5x.

Positive:

- A firm commitment by Virgin Media to adopt a more conservative financial policy (for example, FFO adjusted net leverage of 4.5x) could lead to a positive rating action.

LIQUIDITY AND DEBT STRUCTURE

Virgin Media has an undrawn GBP660m revolving credit facility. Excluding the convertible bond, the company's next bond maturity is January 2018. The amount of cash Virgin Media will end up with over the next month or so is unclear, and depends on the proportion of convertible bondholders that exercise their change of control rights and whether there are further cash distributions to LGI.

FULL LIST OF RATING ACTIONS

Long-term IDR: downgraded to 'B+' from 'BB+', RWN removed, Outlook Stable

Short-term IDR: affirmed at B

Virgin Media Investment Holdings senior secured bank facilities: downgraded to 'BB+' from 'BBB-', RWN removed, assigned 'RR1'

Virgin Media Secured Finance Plc 2018 and 2021 senior secured bonds: downgraded to 'BB+' from 'BBB-', RWN removed, assigned 'RR1'

Virgin Media Finance Plc 2019, 2022 and 2023 senior notes: downgraded to 'B-' from 'BB+', RWN removed, assigned 'RR6'

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