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Fitch Downgrades Vodafone to 'BBB+'; off RWN; Stable Outlook
August 6, 2014 / 6:02 AM / in 3 years

Fitch Downgrades Vodafone to 'BBB+'; off RWN; Stable Outlook

(The following statement was released by the rating agency) LONDON, August 06 (Fitch) Fitch Ratings has downgraded UK-based telecom group Vodafone Group Plc's Long-term Issuer Default Rating (IDR) to 'BBB+' from 'A-'. Fitch has also removed Vodafone from Rating Watch Negative (RWN) and assigned a Stable Outlook to the Long-term IDR. A full list of rating actions is available below. The downgrade is driven by an increase in leverage resulting from the acquisition of 100% of the share capital of Grupo Corporativo Ono, S.A. (ONO). Following the downgrade, Vodafone is comfortably positioned within the 'BBB+' rating. The group benefits from global scale, diverse operations and sound liquidity. Over the next couple of years, free cash flow generation is likely to be hampered by competitive pressures in Europe and by investment needs stemming from network upgrades and spectrum acquisition. Vodafone is likely to end the financial year to March 2015 with a funds from operations (FFO)-adjusted net leverage of around 3.0x, adjusted for ONO, up from 2.1x in FY14 (excluding income dividend from Verizon Wireless). KEY RATING DRIVERS Acquisition Risk Less Significant Following the ONO and Kabel Deutschland acquisitions, Fitch believes that Vodafone's acquisition risk profile is now less significant. Future European investment is more likely to be organic. M&A activity is more likely in emerging markets, with possible consolidation in the Indian market the most relevant for Vodafone. Project Spring Payoff Vodafone's plan to spend around GBP19bn in organic investment over the next two financial years, including Project Spring to build a network quality advantage over its competitors, could increase market share and over time, improve cash flow generation. Visibility of a return on this investment remains limited. Demonstrating to subscribers that a quality differential exists will be key, with either the subscriber willing to pay a price premium for better service quality, or Vodafone maintaining a sustainable competitive advantage. Increasing Emerging Market Exposure 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 Indian tax case and the previous 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 local currency debt helps mitigate this risk. Deteriorating Trends Vodafone continues to experience weak organic service revenue growth trends in almost all of its main markets. While macro-economic conditions and regulatory headwinds should begin to improve, there is still likely to be a continued drag on EBITDA over the coming two years from competitive pressures and further investment. Liquidity not a Risk Vodafone ended FY14 with GBP10.1bn in cash and cash equivalents, GBP3.8bn in liquid investments as well as GBP6.5bn of undrawn committed credit facilities. Fitch believes that Vodafone continues to have strong access to the capital markets to refinance upcoming bond maturities, if required. RATING SENSITIVITIES Negative: Future developments that could, individually or collectively, result in negative rating action include: - FFO-adjusted net leverage trending towards 3.5x - Pressure on free cash flow driven by EBITDA margin erosion, higher capex and shareholder distributions, or significant underperformance in the main operating subsidiaries Positive: Future developments that could, individually or collectively, result in positive rating action include: - FFO-adjusted net leverage below 2.5x on a sustained basis - Strong free cashflow generation with high single digit pre-dividend free cash flow margin (FY14: 9% based on statutory reporting) on a sustainable basis - Project Spring investments leading to an improved competitive position for Vodafone in its European operations FULL LIST OF RATING ACTIONS: Long-term IDR: downgraded to 'BBB+' from 'A-'; RWN removed, Outlook Stable Senior unsecured: downgraded to 'BBB+' from 'A-'; RWN removed Short-term IDR: affirmed at 'F2' Commercial paper programme: affirmed at 'F2' Contact: Principal Analyst Giovanni Reichenbach Associate Director +44 20 3530 1255 Supervisory Analyst Damien Chew, CFA Senior Director +44 20 3530 1424 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Stuart Reid Senior Director +44 20 3530 1085 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology', dated 28 May 2014, are available at www.fitchratings.com Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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