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 potential transaction.
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 LGI).
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 UPC facilities.
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 and beyond.
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 prepetition interest).
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