March 4 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Vodafone's Long-term Issuer Default Rating (IDR) at 'A-' and removed it from Rating Watch Negative (RWN). The Outlook is Negative. A full list of rating actions is below.
The rating actions reflect that although Vodafone's leverage is currently low for an 'A-' rating, the planned expenditure on Project Spring over the next few years will push this metric towards the higher end of the 'A-' range and visibility over the return on these investments remains limited. The strategic temptation for Vodafone to continue to acquire European fixed line assets in order to reduce the potential threat from converged offers, and heightened potential for emerging market acquisitions are also factored into our Outlook.
If these acquisitions occur, they could come at a time when headroom at the 'A-' rating will be significantly reduced due to the Project Spring investments.
KEY RATING DRIVERS
Project Spring Payoff
Vodafone's plan to spend an additional GBP7bn in capex over the next two years could allow it to build a network quality advantage over its competitors, which could increase market share and over time, improve cash flow generation. Visibility of a return on this investment remains limited. However, Vodafone will need to be able to demonstrate to subscribers that a quality differential exists and the subscriber might have to be willing to pay a price premium for this network advantage, depending on Vodafone's competitors' reactions.
Potential Acquisition Risk
Vodafone says it takes decisions on European fixed-line infrastructure on a country-by-country basis and that it could obtain this infrastructure by buying an existing operator, building its own or agreeing a wholesale deal with an incumbent. Vodafone's headroom at the 'A-' level is likely to be significantly reduced over the next few years as a result of Project Spring. In addition to potential European fixed line acquisitions, there is also possible consolidation in the Indian market as well as other additional emerging market opportunities. All of these add acquisition risk to the rating.
Increasing Emerging Market Exposure
Post-Verizon Wireless disposal, Europe's contribution to overall group cash flow is continuing to decline, while the importance of Vodafone's emerging market business continues to grow. This exposes the group to higher degrees of emerging market risk compared with historical levels. The two Indian tax cases and the uncertainty surrounding the 2013 Indian spectrum auctions highlight the unpredictability of these markets. The increasing exposure also exposes Vodafone to the threat of increased FX variability, although Fitch acknowledges the presence of offsetting local currency debt to help mitigate this risk.
Vodafone has experienced deterioration in organic service revenue growth in almost all of the company's main markets. While macro conditions and regulatory headwinds should begin to improve, there is still likely to be a continued drag on EBITDA over the coming few years and there is limited visibility over an inflection point in this trend.
- Expectation of funds from operations (FFO) adjusted net leverage being sustained above 2.5x would lead to negative rating action.
- Sustained pressure on free cash flow (FCF) driven by weak EBITDA growth, higher capex and shareholder remuneration, or significant underperformance in key markets.
Positive (revision of the Outlook to Stable):
- FFO adjusted net leverage below 2.5x on a sustained basis together with healthy FCF generation.
- High single-digit pre-dividend FCF to sales is expected for a 'A-' rating.
- Evidence of successful monetisation of the Project Spring investments, leading to an improved competitive position for Vodafone in its European operations For more details of our views on Vodafone's rating, see "Vodafone: What Investors Want to Know", dated 19 June 2013 at www.fitchratings.com, which looks at Vodafone's plans for its stake in Verizon Wireless and the competitive and economic challenges it faces in Europe.
FULL LIST OF RATING ACTIONS:
Long-term IDR: affirmed at 'A-'; off RWN; Negative Outlook
Senior unsecured: affirmed at 'A-'; off RWN
Short-term IDR: affirmed at 'F2'
Commercial Paper Programme: affirmed at 'F2'