March 4 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Kabel Deutschland Vertrieb and Service GmbH's (KDG)
Long-term Issuer Default Rating (IDR) at 'BBB+' and removed it from Rating Watch Negative (RWN).
The Outlook is Negative, in line with that on its parent, Vodafone Group Plc (Vodafone;
A-/Negative). A full list of rating actions is at the end of this comment.
KDG is an established cable provider in Germany with growing broadband,
telephony and premium/pay-TV franchise. Vodafone acquired a majority 76.6% stake
in the company in October 2013, and is planning to use it as its core
operational platform for wireline development in Germany.
KEY RATING DRIVERS
Strong Shareholder Support
Following the acquisition by Vodafone, Fitch rates KDG using a top-down
approach, at a notch lower from the parent's rating. Operating and strategic
ties between the two companies are strong. KDG gives Vodafone an opportunity to
provide facilities-based wireline services in Germany, which complements its
existing alternative fixed-line franchise and strong mobile positions in the
country. Following the acquisition, Vodafone issued a EUR2.15bn intercompany
loan to KDG, in what Fitch views as evidence of tangible shareholder support.
Weak Legal Ties
Legal ties between KDG and Vodafone are weak. There are no cross-default
provisions in Vodafone's documentation referencing KDG. The parent does not
guarantee any of KDG's debt. KDG has not ruled out the option of continuing to
source funding from the capital market. Fitch does not view a domination and
profit and loss pooling agreement between the two companies as strengthening
legal ties as it does not provide protection for KDG creditors.
Mid 'BB' Standalone Credit Profile
Although the company's standalone operating profile is potentially consistent
with a low investment grade rating, this is offset by high leverage, leaving KDG
with a standalone credit profile at the mid 'BB' level. The company recently
reiterated its leverage target range of between 3.0x and 3.5x net debt/adjusted
EBITDA (as per the company's definition).
Stable TV Business
KDG benefits from a stable basic TV subscriber base that generates almost
utility-type revenue. This is 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 fairly stable for
many years at around 50% and is unlikely to come under significant pressure.
Strong Broadband Growth
KDG has experienced strong broadband growth in a mature market. 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 inroads into competitors' market shares.
Solid Network Infrastructure
Where upgraded to the Docsis 3.0 standard, KDG's cable network is currently
capable of delivering super-fast commercial speed of 100 megabits per second,
turning the company into a strong facilities-based internet broadband provider,
ahead of telecoms incumbent in many areas. However, Docsis3.0 upgrades are
taking longer than initially projected. The continuing EUR300m accelerated capex
programme suggests that certain other infrastructure upgrades are more necessary
Strong Margins and FCF
KDG's EBITDA margin is strong at 47.7% in the in the last 12 months to December
2013 and has been improving, due to its enlarged scale. A planned EUR300m of
accelerated capex in 2013-2014 would temporarily put pressure on cash flows, but
Fitch estimates that pre-dividend FCF generation should remain positive.
Fitch rates KDG's secured debt at the same level at its IDR, as the agency
typically does not notch up ratings for security for investment-grade-rated
issuers. Unsecured creditors at the level of Kabel Deutschland Holding AG, an
immediate holding company above KDG, are structurally subordinated to unsecured
creditors to KDG and are therefore notched down.
Stronger legal ties with Vodafone, such as the parent guaranteeing KDG's debt,
may lead to an upgrade of the IDR and selected instrument ratings.
Weaker operating and strategic ties with Vodafone may put pressure on the
FULL LIST OF RATING ACTIONS
Long-Term IDR: affirmed at 'BBB+', removed from RWN; Outlook Negative
Senior secured notes due 2018 issued by KDG: affirmed at 'BBB+', removed from
Senior notes due 2017 issued by KDH: affirmed at 'BBB', removed from RWN