(Repeat for additional subscribers)
April 4 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Virgin Media Inc.'s (Virgin Media) Long-term Issuer Default Rating (IDR) at 'B+' with a Stable Outlook. A full list of rating actions is below.
Virgin Media's key strength is its "second-incumbent" qualities in the UK and its strong market share within its geographic footprint. Competition in the UK triple-play services market has increased with BT Group's push into pay-TV, but Virgin Media has produced a steady financial performance with healthy cash flow generation despite limited subscriber growth. Fitch expects Liberty Global, Virgin Media's parent company, to continue to run Virgin Media's leverage near the higher end of 5.0x net debt/EBITDA ratio, as it does with its other European cable subsidiaries.
KEY RATING DRIVERS
Stable Market Position
A maturing market and a fairly even split in market share, coupled with a drive towards ever faster broadband and increased bundling has resulted in Virgin Media being able to increase subscription fees without dropping subscribers (approximately 0.4% growth in 2013). The continued rationalisation in the UK broadband market together with Virgin Media's unique high quality network positions Virgin Media as a quasi-incumbent within its geographic footprint with a high quality broadband service and a strong overall bundled product offering.
Infrastructure vs. Content
Sky leads the pay-TV market in the UK with 10.4m customers vs. Virgin Media's 3.8m. However, Virgin Media positions itself as a distributor rather than a content owner. This reflects Virgin Media's key competitive advantage of high speed broadband provision, rather than competing for content. Whereas BT have moved into content (notably through the purchase of live football broadcasting rights), Virgin Media positions itself as a distributor, making Sky a strategic partner in the provision of content as well as a strong rival.
Emergence of Quad Play
Although the UK is a highly competitive market, it is more stable relative to other European countries. This is driven by high residential broadband penetration (c75% of households), consolidating market structure (four players hold near 90% of total subscribers), increased bundling (Virgin Media sells 2.5 products per customer) and reduced churn. Virgin Media have increased the "stickiness" of their offering with mobile services via a mobile virtual network operator (MVNO) agreement with EE, formerly called Everything Everywhere.
However, BT also recently announced an MVNO agreement with EE and Fitch expects BT to enhance their consumer service offering with a mobile component. This is likely to have implications for Sky and TalkTalk as well as for mobile operators such as Vodafone and O2, who may respond with their improved bundled offerings.
Increased "Bundling" Competition
Having increased subscription fees in 2013 while suffering limited subscriber losses, Virgin Media appears to be operating in a stable market. However, increasing bundling competition (such as BT and Virgin Media partnering with EE) amongst the main four fixed line operators means that each player will have to guard their market position as well as focusing on the monetisation of their existing customer bases.
Capital Structure Constraints
Liberty Global's financial strategy requires their operating subsidiaries to take on significant levels of debt. While Virgin Media's strong and stable cash flows may make this strategy highly effective, it constrains the rating due to high leverage. Fitch calculates year-end 2013 funds from operations (FFO) adjusted net leverage at 4.9x, which is in line with a sub-investment grade profile.
High Recovery for Senior Creditors
Despite gross senior secured financial debt of GBP6.8bn (FY2013), recovery prospects for senior secured bond holders are high. This is underpinned by the extensive cable network (12.5m homes passed, 4.9m customers) and the long-term capability of Virgin Media's network to provide high speed internet. The senior secured debt has a rating of 'BB+'/'RR'1, three notches higher than the IDR. However, Fitch expects limited recovery for junior creditors; unsecured debt is currently rated 'B-'/'RR6'.
- Negative rating action could occur if the company's FFO adjusted net leverage increases above 5.5x, FFO fixed charge cover falls below 2.5x or if pre-dividend free cash flow margin falls below 5% on a sustainable basis
- A material decline in operational performance, regulatory change or other significant negative impact to the current dynamics of the pay-TV, telephony and broadband business in the UK would be ratings negative.
- 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 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. Total cash at year-end 2013 was GBP343m.
FULL LIST OF RATING ACTIONS
Long-term IDR: affirmed at 'B+', Outlook Stable
Short-term IDR: affirmed at 'B'
Virgin Media Investment Holdings senior secured bank facilities: affirmed at 'BB+'/'RR1'
Virgin Media Secured Finance Plc 2018 and 2021 senior secured bonds: affirmed at 'BB+'/'RR1'
Virgin Media Finance Plc 2019, 2022 and 2023 senior notes: affirmed at 'B-'/'RR6'