Nov 28 - Fitch Ratings has affirmed Vodafone Group Plc's
Long-term Issuer Default Rating (IDR) at 'A-' The Outlook is Stable. A full list
of rating actions is below.
Vodafone benefits from global scale, diverse operations, sound liquidity, and
stable cash flow generation. However, slowing growth, partly due to continued
underperformance of its Southern European operations is a growing concern.
Vodafone is well positioned to benefit from increasing mobile data usage, but
the inflection point in revenue growth remains uncertain. The receipt of
substantial and regular dividends from Verizon Wireless (VZW) is increasingly
more important to maintain Vodafone's 'A-' rating.
- Weakness in Southern Europe
Vodafone's H1FY13 results (six months to end September) revealed the extent of
the weakness in Southern Europe, with underlying revenue and profitability
trends coming in below Fitch's expectations. Continued negative trends in
Southern Europe (30% of Vodafone's FY12 consolidated EBITDA came from Spain,
Italy, Portugal and Greece) is likely to put pressure on Vodafone's credit
- Shift to Mobile Data
The transition to mobile data is well underway in the telecoms industry. In more
technologically advanced telecoms markets, up to 70%-80% of mobile network
traffic is data. Operators, including Vodafone, are starting to shift their
pricing strategy to data-centric tariffs. As smartphone penetration increases
into the mass market, estimating the propensity of customers to spend on service
bundles including data is difficult. Therefore the inflection point in Vodafone
and other operators' revenue and ARPU trends, is hard to predict. Although the
experience in the US has been positive, the spend on mobile data is likely to be
driven by country-specific factors - culture, the economic environment and the
competitive landscape. Vodafone continues to invest in its network as it seeks
to maintain its competitive advantage in network quality to benefit from growing
mobile data revenue.
- Verizon Wireless Dividend Credit Positive
Vodafone should receive a substantial ongoing dividend from VZW. Vodafone's
share of the first substantial dividend of USD4.5bn (for calendar 2011) was
received in January 2012. The announced second payment of USD3.825bn (for
calendar 2012) should be received in December 2012. There is limited visibility
around the timing of these dividends, but they are significant relative to
Vodafone's FCF (before dividends and spectrum) of around GBP5.3bn-GBP5.5bn in
- Financial Flexibility
Fitch believes that the VZW dividend stream gives Vodafone enough flexibility to
manage leverage within the 2.5x FFO adjusted net leverage threshold to maintain
an 'A-' rating, a level which management has committed to. FY13 is the last
financial year of Vodafone's stated three year policy to grow dividend per share
at 7% per annum. Fitch would expect future shareholder remuneration to be
compatible with maintaining conservative credit metrics, and to support
financial flexibility in the face of any further erosion of its consolidated
- Accounting Changes in FY14
New IFRS 11 accounting standards regarding joint ventures will come into effect
in FY14 (which starts in April 2013). This will mean that Vodafone's current
practice of proportionate accounting of its Italian operations will end,
reducing reported EBITDA. This change in accounting will be neutral for
Vodafone's rating. Fitch's methodology focuses on effective control over cash
flow from operating assets and adjustments for accounting treatments can be made
when assessing a company's credit profile.
RATING SENSITIVITY GUIDANCE:
Positive: Future developments that could lead to positive rating actions
- Unless Vodafone adopts more restrictive financial policies with respect to
financial leverage and shareholder remuneration, further positive rating action
is currently unlikely.
Negative: Future developments that could lead to negative rating action include:
- Expectation of FFO adjusted net leverage being sustained above 2.5x would put
pressure on Vodafone's rating. A prolonged delay in receiving VZW dividends
could lead to leverage significantly increasing.
- Operationally, higher competitive intensity which would depress operating free
cash flow would exert negative pressure on Vodafone's credit profile.
- Around 30% of Vodafone's consolidated EBITDA comes from the eurozone
periphery. A worsening of the eurozone crisis could lead to downward rating
LIQUIDITY AND DEBT STRUCTURE
Liquidity remains strong. Vodafone had GBP4.3bn of cash and cash equivalents on
its balance sheet at the end of September 2012, as well as GBP3.0bn of
short-term investments (index-linked UK government bonds and high quality money
market funds) and almost GBP6.2bn equivalent of undrawn committed facilities.
This compares with GBP1.7bn of outstanding commercial paper and GBP6.9bn of
other short-term borrowings at the end of September 2012.
FULL LIST OF RATING ACTIONS
Vodafone Group Plc
Long-term IDR: affirmed at 'A-', Outlook Stable
Senior unsecured debt: affirmed at 'A-'
Short-term IDR: affirmed at 'F2'