RPT-Fitch Places Cableuopa on Rating Watch Positive on Vodafone Offer

Tue Mar 18, 2014 5:41am EDT

March 18 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has placed Cableuropa S.A.'s (Cableuropa) Issuer Default Rating (IDR) of 'B' on Rating Watch Positive (RWP) following the announcement of the proposed acquisition of Grupo Corporativo Ono, S.A. (Cableuropa's ultimate holding company) by Vodafone Group plc (Vodafone; A-/RWN). A list of debt securities/instruments affected by the RWP is provided at the end of this commentary.

The rating watch recognises the potential for Cableuropa to be owned and become part of a materially stronger and higher-rated parent, with the company likely to benefit from increased financial flexibility, alongside revenue and operating cost synergies.

Key to any eventual upgrade of Cableuropa will be a review of management's medium-term intentions with respect to Cableuropa's current outstanding debt and future funding. The transaction is subject to antitrust approval and is expected by Fitch to close in 2014. Fitch expects to resolve the rating watch shortly after the transaction's close.

For Fitch's views on the implications for Vodafone see separate commentary on "Fitch Puts Vodafone on Rating Watch Negative" dated 18 March 2014 at www.fitchratings.com

KEY RATING DRIVERS

Parent-subsidiary Linkage

The linkage between Cableuropa and its new parent will be considered according to Fitch's parent-subsidiary methodology. Strong linkage can, in certain circumstances, lead to an equalisation of the companies' respective ratings. A final outcome will depend on an assessment of legal, operational and strategic ties between the two companies.

In the absence of a parent company guarantee of Cableuropa's existing debt, some notching down from the stronger rated parent can, however, be expected (Fitch notes that in the case of Vodafone's acquisition of German cable operator, KDG, the latter was rated at BBB+ following transaction close in December 2013, one notch below the parent).

Quad-Play and Operational Benefits

Cableuropa is Spain's largest cable operator. The company has approximately 1.9 million retail customers (residential and small business) and has a fibre network built-out past 7.2 million homes (approx. 40% of Spain's primary homes). The company has established a solid presence in the country's telecoms market with telephony and high-speed broadband its most strongly penetrated services. A rapidly growing mobile business - currently offered through a virtual mobile network operator agreement with Telefonica - has seen the company increase mobile customers to 1.1 million by FY13. Spain is one of the most advanced quad-play markets in Europe, with the potential for Cableuropa to integrate and cross-sell its fixed- line services with Vodafone, the country's second-largest mobile operator (by subscribers and revenues), offering the potential for material revenue and cost synergies.

Future Funding Strategy

The post-acquisition funding strategy at Cableuropa will be key to identifying the potential notching between the company and its parent when resolving the rating watch. Cableuropa has approximately EUR3.5n of debt outstanding composed of a mix of secured bank debt, secured notes and unsecured notes - all of which benefit from change of control language in documentation. Second call dates for most of the bonds fall between 4Q14 and 1Q15, in Fitch's view providing the most obvious opportunity for management to consider any potential near-term refinancing plans given the sizeable cost savings that could be achieved from a more centralised funding strategy.

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:

-Completion of the announced acquisition by Vodafone, which is likely to lead to an upgrade of Cableuropa and its related debt. In the event the transaction does not proceed the RWP will be removed and the ratings would be expected to be affirmed at current levels, reflecting the company's standalone credit profile. On a stand-alone basis Cableuropa exhibits a solid operating profile in the context of a difficult operating environment; where the economy, intensifying competition and austerity-driven fiscal policies have had an impact on the company's revenues, operating margins and cash flow.

- Funds from operations (FFO) net leverage below 5.0x (correlating to around 4.5x net debt EBITDA) and the generation of a high-single digit free cash flow margin could lead to an upgrade. Fitch will also monitor Cableuropa's ability to manage any increase in competitive dynamics over the coming years. Negative: Future developments that could lead to negative rating action include:

- An increase in FFO-adjusted net leverage above 5.5x, together with a substantial weakening of the company's cash flow generation ability

The following instruments have been placed on RWP

Cableuropa senior secured bank: 'BB-'/'RR2'

Nara Cable Funding senior secured bonds: 'BB-'/'RR2'

Nara Cable Funding II senior secured bonds: 'BB-'/'RR2'

ONO Finance II plc unsecured notes: 'CCC+'/'RR6'