Nov 27 -
Summary analysis -- Liberty Global Inc. --------------------------- 27-Nov-2012
CREDIT RATING: B+/Positive/-- Country: United States
Primary SIC: Cable and other
pay TV services
Credit Rating History:
Local currency Foreign currency
20-Dec-2007 B+/-- B+/--
20-Feb-2006 B/-- B/--
Standard & Poor's Ratings Services bases its ratings on international cable TV
(CATV) and broadband and telephony services provider Liberty Global Inc. (LGI)
on its assessments of the company's business risk profile as "satisfactory"
and its financial risk profile as "highly leveraged."
LGI's very aggressive financial policy--which includes ongoing acquisitions
and sizable share buybacks, and still-modest free cash flow
generation--constrains the ratings on the group.
Rating supports include LGI's large and well-diversified asset portfolio,
which has some utility-like characteristics in the CATV business, prospects of
sustained revenue and EBITDA growth and solid profitability, and proactive
liquidity management using long-dated debt maturities.
S&P base-case operating scenario
We view LGI's business risk profile as well established in the satisfactory
range, with what we consider to be superior asset portfolio diversity and
medium- to long-term growth prospects versus most rated European cable peers.
Based on our expectations of steady take-up of bundled products (including
digital CATV, telephony, and broadband Internet) and the progressive migration
of LGI's analog subscriber base toward digital services, we foresee continued
positive operating trends for the group in the next two years. On Sept. 30,
2012, only 45% of LGI's customers subscribed to a bundled product. Digital
penetration, while steadily growing, was still low, at about 50% across LGI's
subscriber base, compared with rates at Western European and U.S. peers. As
observed in other European markets in the recent past, we expect LGI's recent
launch and planned rapid rollout of its next-generation TV platform,
"Horizon," across its key Western European operations to further drive
penetration of its digital TV and triple-play products.
Standard & Poor's projects mid-single-digit organic revenue and EBITDA growth
for LGI in 2012, with sustained, strong profitability and group EBITDA margin
above 45%. Operating performance should remain solid in Western Europe in
2012, particularly in Germany and Belgium owing to the uptake of triple-play
services, largely offsetting the operating challenges of certain activities in
Central and Eastern Europe.
S&P base-case cash flow and capital-structure scenario
Despite its sustained EBITDA growth and solid profitability, LGI reported
still modest free operating cash flow (FOCF) in the first nine months of 2012,
in our view, given the large scale of the group, up to $365 million from $208
million over the same period in prior year, constrained by sustained heavy
network investments. Our FOCF calculation differs from the group's published
adjusted free cash flow figure, which excludes certain financial costs and the
negative cash flow contribution from its Chilean mobile operations.
In September 2012, LGI announced its intention to launch a voluntary and
conditional cash offer, for all of the shares of Belgian cable operator
Telenet Group Holding N.V. (B+/Positive/--) that it does not already own for a
total of maximum EUR2.0 billion. We note that during the third quarter of 2012
the group raised a roughly similar amount of net additional financings,
through several long-term notes issues, enabling it to prefund entirely the
Following this increase in debt, we estimate that Standard & Poor's ratio of
adjusted gross debt to EBITDA for LGI remained at a high 5.7x on Sept. 30,
2012, declining slightly from 5.9x at year-end 2011. However, we estimate this
ratio could decline to about 5.25x in the coming quarters, given our
expectations of sustained revenues and EBITDA growth and the likely
integration of a higher share of Telenet EBITDA in LGI's adjusted EBITDA post
transaction. This reflects the fact that we currently treat LGI's indirect
50.2% stake in Telenet Group Holding N.V. on a proportionate consolidation
basis, while LGI fully consolidates this entity.
We would view a ratio of adjusted gross debt-to-EBITDA ratio below 5.25x as an
adequate level to consider a one-notch upgrade of LGI. We note, however, that
additional shareholder returns or acquisitions beyond what we currently
anticipate, and continued very high network and other capital investments (at
about 20% of sales), could prevent or delay such improvement in credit metrics.
LGI's liquidity is adequate, under our criteria. We expect the group's sources
of liquidity, including cash and facility availability, to exceed its uses by
more than 1.5x in the next 12 months.
On Sept. 30, 2012, LGI reported unrestricted cash and cash equivalents of $3.3
billion and had about $1.4 billion of borrowing capacity under its various
committed facilities, as permitted by covenant compliance calculations on that
date. These fully covered its short-term debt, capital lease obligations of
$292 million, and accrued interest of $323 million, as well as its potential
buyout of Telenet minority shareholders (assuming a EUR35 per share offer from
Of the unrestricted cash, LGI and its nonoperating subsidiaries held $2.1
billion on Sept. 30, 2012. This reflects LGI's policy of maintaining a
liquidity cushion of at least $500 million available to the parent company.
Of the $1.4 billion of undrawn amounts available under its various committed
facilities on Sept. 30, 2012, a large part of the total stemmed from credit
facilities at UPC Broadband Holding B.V. (UPC; B+/Positive/--) and from
Telenet Group Holding N.V. (not rated). The availability of UPC facilities is
subject to quarterly financial covenant tests, such as senior debt to
annualized EBITDA (4.0x), EBITDA to total cash interest (3.0x), EBITDA to
senior interest (3.4x), minimum debt service coverage (1.0x), and total debt
to annualized EBITDA covenants (5.75x). Although the headroom under some of
these covenants has been consistently tight in the past few years (at or below
10% for leverage covenants for example), LGI actively manages its compliance
with these covenants as part of its financial policy to maximize drawings of
LGI continues to take proactive steps to extend the maturity profile of its
bank facilities and of its notes. The group typically refinances debt well in
advance of the maturity dates. Over 95% of consolidated debt is due in 2016
The senior secured loan facilities issued by LGI's indirect subsidiaries, UPC
and related entity UPC Financing Partnership are rated 'BB-', one notch higher
than the corporate credit rating on LGI. The recovery rating on these
facilities is '2', indicating our expectation of substantial (70%-90%)
recovery in the event of a default. In addition, the issue ratings on the
senior secured notes issued by special purchase vehicles UPCB Finance I-III,
and V-VI are 'BB-'.
The various senior notes issued by UPC Holding B.V. are rated 'B-' two notches
lower than the corporate credit rating on LGI. These notes have a recovery
rating of '6', indicating our expectation of negligible (0%-10%) recovery for
creditors in the event of a payment default.
We continue to assume that UPC would be reorganized in the event of default,
which we envisage would most likely be triggered by an inability to refinance
debt maturing in 2017 after operating underperformance. Under our revised
default scenario, EBITDA at default would have fallen to around EUR1.25 billion
with a stressed enterprise value of EUR7.5 billion.
We deduct around EUR710 million of priority liabilities from the stressed
enterprise value which is mainly comprised of enforcement costs, leaving a net
value of around EUR6.8 billion for senior secured debtholders. We assume around
EUR8.7 billion of senior secured debt outstanding at default, which includes six
months' prepetition interest and our assumption that the group refinances its
maturities in full prior to 2017. This means there is sufficient value for
substantial (70%-90%) recovery for senior secured lenders. This leaves
negligible (0%-10%) recovery for senior notes (EUR1.66 billion including
Given the company's track record of liability management, we note that the
recovery prospects for senior secured lenders could be particularly sensitive
to changes in the capital structure, and our recovery ratings could be
negatively affected by, for example, a change in the proportion of senior
secured to unsecured debt, an increased debt burden of the company, other
meaningful changes in the capital structure, or changes to the scope of the
UPC asset pool through acquisitions or disposals.
The positive outlook signals that we could raise the long-term rating on LGI
by one notch in the next 12 months if it is able to post sustained EBITDA and
FOCF growth on the back of its Western European operations, and this in turn
results in sustainable improvement in its adjusted debt-to-EBITDA ratio.
Specifically, we could consider an upgrade if LGI is able to markedly increase
its FOCF generation to close to $1 billion per year, implement some moderation
in its financial policy, and reduce adjusted debt to EBITDA to below 5.25x.
That said, before considering a positive rating action, we would assess LGI
management's financial policies and plans, particularly with regard to future
distributions to shareholders and acquisitions.
The group's focus on its share buyback program as a means of enhancing
shareholder value remains a risk from a credit perspective and partly limits
rating upside. Deteriorating operating performance, failure to improve and
sustain FOCF generation into the $500 million-$1 billion range, an increase to
the ongoing share buyback program, or an additional large highly leveraged
acquisition would likely lead us to revise the outlook to stable.
Related Criteria And Research
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
Sept. 18, 2012
-- Europe's Cable Industry Is Sending Clear Signals Of Revenue Growth,
May 24, 2012
-- The Largest Operators Have The Most To Lose In Europe's Telecom
Market, Nov. 7, 2012