January 5, 2018 / 5:14 PM / in a year

Fitch Affirms VodafoneZiggo at BB-; Outlook Remains Negative

(The following statement was released by the rating agency) LONDON, January 05 (Fitch) Fitch Ratings has affirmed VodafoneZiggo Group B.V's (VodafoneZiggo) Long-Term Issuer Default Rating (IDR) at 'BB-'. The Outlook remains Negative. A full list of rating actions is at the end of this commentary. VodafoneZiggo's ratings take into account the company's strong business profile, stabilising financial performance and high financial leverage. Medium-term expectations of an improving market structure underpin prospects for a stronger revenue outlook. The Negative Outlook is driven by financial leverage, which is expected to remain above its downgrade threshold in 2018 and 2019. Shareholder payments and the delivery of target synergies are important if this metric is to improve. KEY RATING DRIVERS Shareholder Payments Key: Moderating shareholder payments along with the delivery of synergies are key to future deleveraging. Management increased its 2017 distribution guidance by EUR250 million with its operating cash flow (OCF) guidance upgrade. Effectively leveraging cash flows by a factor of 5x underlines Fitch's view that leverage will be managed on the high side. High Leverage: Financial leverage is too high for the rating. FFO adjusted net leverage is forecast by Fitch to end 2017 at 5.7x (as previously expected) against a downgrade threshold of 5.2x. Although improving as OCF strengthens, we expect leverage to remain above 5.2x through to 2019. In addition, VodafoneZiggo's net leverage as defined in the transaction documents at 4.54x in Q32017 remains in compliance with its covenant. Management guidance for 2018 OCF and shareholder payments will provide a strong signal for the pace of future deleveraging; distribution guidance that sustains leverage above 5.2x indefinitely is likely to lead to a downgrade. VodafoneZiggo's operational performance is improving. Upgraded 2017 OCF guidance of EUR1.7 billion (previously EUR1.65 billion) suggests integration is on track. Dutch Telecoms Remain Pressured: The Dutch telecoms market, like many in Europe has been through a period of sustained pressure and market contraction. A progressive incumbent has invested effectively in fibre and TV, while a four-player mobile market has been challenged in particular by the presence of aggressively positioned Tele2. Data from market regulator ACM identifies an aggregate market contraction (including subscription TV) of 9% between 2013 and 2016, with aggregate fixed revenues down 14% and mobile falling 8%. Trends appear to be stabilising. The overall market was down 2.8% in 2016, although mobile, down 4.6%, remains pressured. Subscription TV has been positive, with growth above 1.5% in each of the past three years, with the incumbent and others taking market share from cable. High mobile data usage, appetite for ultrafast (more than 100Mbit/s speed) fixed broadband and bundling are expected to support improvements in market trends. Cable Operations Stabilised: Challenges in the cable business following the 2014 merger of Ziggo and UPC have been addressed. Combined 9M17 cable revenues were up 0.2% following a 2% decline in 2016. Consumer cable revenues have shown increasing strength, stabilising in 3Q17 while B2B cable revenues are growing strongly. This as an important step in a market where competition from the telecoms incumbent, KPN, has been high but is expected to be more rational given the market structure following the creation of VodafoneZiggo. Mobile Pressures Remain: The mobile environment continues to be difficult, both across the market and for VodafoneZiggo. VodafoneZiggo's combined mobile revenues were down 10% in 9M17, with business mobile down 12.4% showing particular weakness - trends which have become progressively worse through the year. These pressures have been driven by intense competition as well as regulation - the introduction of roam-like-home tariffs in Europe and termination rate cuts. Fitch expects operating conditions and mobile performance to remain tough in 1H18 but show improvements into the second half of 2018. Business Profile Strengthened, Convergence Important: Market conditions and competition remain pressured, but Fitch believes the combination of the country's national cable operator and the mobile market number two, position VodafoneZiggo strongly in a market which is ultimately likely to become more rational and where convergence will be important. This trend can be seen in the 780,000 of VodafoneZiggo's 3.9 million fixed-line subscribers who are now converged customers. Mobile competition has yet to ease; Fitch nonetheless expects VodafoneZiggo and incumbent, KPN, to benefit from consumer appetite for high broadband speeds in fixed and quad-play services. The ability to stream content across multiple devices and technology platforms will be attractive and increase convergent penetration. The proposed merger of T-Mobile and Tele2 in the Netherlands underlines the importance of convergence. In the near term mobile pressures are unlikely to ease, but over the longer term Fitch expects a more balanced and rational market, albeit one where the convergent landscape will be more competitive. DERIVATION SUMMARY VodafoneZiggo's ratings are underpinned by a solid operating profile, strengthened by the prospect of a strong convergent position following formation of the JV and an improved operating environment. The cable business appears to be stabilising. Its mobile operations remain under pressure given the competitive environment, while the company exhibits weaker financial metrics than would be expected at the rating level, including high leverage. The company's closest peers - Virgin Media Inc. and Telenet N.V. (both BB-/Stable) - offer similar characteristics in terms of business and market potential, but are performing better operationally and have stronger financial metrics. Fitch expects business performance at VodafoneZiggo to stabilise and improve over time. When the rating stabilises will depend on the timing of integration benefits and recovery in the mobile business, along with the shareholders' ultimate intentions with respect to distributions and leverage KEY ASSUMPTIONS Fitch's Key Assumptions Within Our Rating Case for the Issuer Fitch's key assumptions within our rating case include: - revenues of around EUR4.0 billion in 2017; - 2017 OCF/EBITDA before integration costs (of approximately EUR30 million) of EUR1.7 billion, which value includes the shareholder recharges of around EUR235m; - the following forecast years reflect revenue growth stabilisation and margin expansion reflecting scale economies and the delivery of synergies: - 50% of shareholder recharges written back to FFO - reflecting their capex nature; - 2017 capex to sales of around 24% - including EUR0.1 billion of shareholder recharge capex, with capex/sales excluding the recharge of around 21%; - Shareholder payments of EUR750 million in 2017, and EUR600 million a year thereafter. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action FFO adjusted net leverage sustainably below 4.5x (5.5x at end-2016 pro-forma for escrowed cash), with strong and stable FCF generation, reflecting a stable competitive and regulatory environment Future Developments That May, Individually or Collectively, Lead to Negative Rating Action Failure to reduce FFO adjusted net leverage to below 5.2x by end-2018 on a sustainable basis Further deterioration in competitive pressures and inability to show recovery in operational performance. Signs of a stabilising revenue environment in mobile towards the end of 2018 are considered an important operating metric (added language to previously published guidance). LIQUIDITY Sound Liquidity: At end-3Q17 the company reported cash of EUR392 million and an undrawn credit facility due 2022 of EUR800 million. Experience across the Liberty Global group is that cash is typically managed at low levels. Comments from VodafoneZiggo's joint shareholders indicate this is also likely to be the case in the JV and available excess cash upstreamed to the shareholders. The debt structure is a combination of secured bank and bond debt, and unsecured bonds. Vendor financing is not included in covenant leverage but is included in all Fitch defined metrics. FULL LIST OF RATING ACTIONS VodafoneZiggo Group Holding BV Long-Term Issuer Default Rating (IDR):'BB-'/Negative Outlook affirmed Ziggo B.V. Secured bank debt/secured notes:'BB+'/'RR1' affirmed Ziggo Secured Finance B.V. Secured bank/secured notes:'BB+'/'RR1' affirmed Ziggo Secured Finance Partnership Secured bank debt 'BB+'/'RR1' affirmed LGE HoldCo VI B.V. Senior notes:'B'/'RR6' affirmed Ziggo Bond Finance B.V. Senior notes:'B'/'RR6' affirmed Contact: Principal Analyst Alex Cherepovitsyn, CFA Analyst +44 20 3530 1755 Brendan Condon Director + 44 203 530 1599 Supervisory Analyst Stuart Reid Senior Director +44 20 3530 1085 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Damien Chew, CFA Senior Director/Head of TMT +44 20 3530 1424 Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. Additional information is available on 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. 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