(The following statement was released by the rating agency)
Jan 10 -
Summary analysis -- Ziggo Bond Co. B.V. --------------------------- 10-Jan-2013
CREDIT RATING: BB/Stable/-- Country: Netherlands
Primary SIC: Communications
Credit Rating History:
Local currency Foreign currency
02-Apr-2012 BB/-- BB/--
22-Apr-2010 B+/-- B+/--
The ratings on Netherlands-based Ziggo Bond Co. B.V., the indirect full owner
of the largest Dutch TV cable operator, reflect Standard & Poor's Ratings
Services' view of the group's "satisfactory" business risk profile and
"aggressive" financial risk profile, as our criteria define the terms.
The ratings are constrained by Ziggo's aggressive financial risk profile,
which reflects both the company's majority ownership by private equity
sponsors and its stated financial policy. Conversely, we consider that the
business risk profile is underpinned by Ziggo's strong cable and overall TV
market position in an attractive market and its state-of-the-art network.
These factors translate into very high margins and strong free cash flow
generation, and should allow revenue growth through consumers' ongoing shift
to digital and bundles. That said, we are also mindful of the head-to-head
competition Ziggo faces against domestic incumbent Koninklijke KPN N.V. (KPN;
BBB/Watch Neg/A-2), and the latter's gradual rollout of very high bit-rate
digital subscriber line or fiber, which could narrow Ziggo's advantage over
S&P base-case operating scenario
In our base-case assessment, we anticipate that Ziggo's increasing share of
the bundled-product market and the shift to digital from analogue will allow
for 3%-5% revenue growth for 2012-2013 on average, after a buoyant 4.9%
revenue increase in the first nine months of 2012. We anticipate that blended
average revenue per user will continue increasing on the back of growth in
bundled offerings, digital TV, and related services such as premium TV
While we note that Ziggo has a track record of very high profitability, we
think that the EBITDA margin may have peaked and could decline somewhat from
the very high 57.4% achieved in the first nine months of 2012. This erosion
could result from further spending on customer services and marketing to
compete against KPN's ambitious fixed broadband turnaround targets. In
addition, gross margins on digital TV are lower than on analogue. These
impacts will likely be cushioned by better fixed-cost absorption, however.
S&P base-case cash flow and capital-structure scenario
In our base-case scenario, we forecast robust free cash flow of about EUR300
million-EUR400 million annually for the next two years. However, we think that
Ziggo will likely distribute a large part of its free cash flow to its
shareholders, as the company's leverage stood at 3.4x at the end of September
2012, already within its financial policy target of a long-term net
debt-to-EBITDA ratio of about 3.5x. We anticipate that the company's financial
policy target will consistently translate into a Standard & Poor's-adjusted
debt-to-EBITDA ratio of less than 4x, which we think is adequate for the
We assess Ziggo's liquidity as "adequate" under our criteria, reflecting the
absence of debt amortization through 2017 and our expectation of consistently
robust discretionary cash flow, balanced by likely aggressive shareholder
As of Sept. 30, 2012, we estimate that the company's sources of liquidity for
the following 12 months will comfortably exceed uses by more than 1.2x. We
anticipate that liquidity sources will include:
-- About EUR600 million in funds from operations;
-- More than EUR200 million in cash; and
-- A EUR50 million undrawn committed facility maturing in September 2014.
Our forecasts of Ziggo's liquidity needs over the same period include:
-- About EUR250 million in capital expenditures; and
-- About EUR100million-EUR200 million in shareholder distributions (including
a likely EUR110 million final dividend in April 2013).
Cash flows are not seasonal, as most customers pay monthly fees by direct
debit. In addition, we anticipate comfortable headroom under financial
covenants in the near future. A large amount of senior debt matures in
The issue rating on the EUR750 million senior secured notes issued by the
special-purpose vehicle (SPV) Ziggo Finance B.V. (not rated) is 'BBB-', two
notches above our corporate credit rating on Ziggo. The issue rating reflects
the recovery rating of '1', assigned to SPV term loan E, indicating our
expectation of very high (90%-100%) recovery for lenders in the event of a
The issue rating on the EUR1.2 billion senior notes is 'BB-', one notch below
our corporate credit rating on Ziggo. The recovery rating on these notes
remains a '5', indicating our expectation of modest (10%-30%) recovery in the
event of a payment default.
To determine recoveries, we simulate a hypothetical default scenario. We
believe that a default would most likely result from excessive leverage after
a sustained period of operating underperformance. We have revised our
hypothetical year of default to 2017 from 2015, given the conversion into
equity of shareholder loans that previously matured in 2015, triggered by an
inability to refinance senior secured debt facilities maturing in 2017.
We value the group as a going concern, given Ziggo's resilient and profitable
utility-like cable TV operations in the Netherlands, its satisfactory business
risk profile, valuable cable network and customer base, and high barriers to
entry in the consolidated cable industry.
At our current simulated hypothetical point of default in 2017, we envisage
EBITDA will have declined to about EUR470 million and estimate the company's
stressed enterprise value at about EUR2.7 billion.
With regard to the pass-through transaction, although we have not assigned a
recovery rating to the senior secured notes, we believe that recovery
prospects for these notes are intrinsically linked to the recovery prospects
on the senior secured term loan E. We base this view on the assignment of
rights granted to noteholders under the SPV tranche facilities.
The stable outlook reflects our view that Ziggo will maintain its solid market
positions, consistently generate robust free cash flows, and not deviate from
its stated financial policy guidelines. We base the ratings on our forecast
that the adjusted debt-to-EBITDA ratio will remain at less than 4x, free cash
flow to debt at about 10%, and EBITDA interest cover higher than 4x.
Rating downside could occur if Ziggo's financial policy became more aggressive
than we currently expect.
Rating upside seems remote at this stage, given the combination of continued
private equity sponsor control and our view of a related aggressive financial
policy, including management's target for debt leverage.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
Portal, unless otherwise stated.
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011