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Rating Action:

Moody's affirms UPC's ratings (Ba3 CFR); outlook remains negative

19 Sep 2018

London, 19 September 2018 -- Moody's Investors Service ("Moody's"), has today affirmed UPC Holding B.V.'s ("UPC" or "the company") Ba3 Corporate Family Rating (CFR), Ba3-PD Probability of Default Rating (PDR), B2 senior unsecured debt ratings as well as the Ba3 ratings on the senior secured debt issued by UPC's finance subsidiaries. The outlook on the ratings remains negative.

A full list of affected ratings can be found at the end of this press release.

"Although UPC has recently used around €900 million of disposal proceeds from Austria's sale towards debt reduction, its Moody's adjusted gross leverage still remains high at around 5.5x. As a result the Ba3 rating remains weakly positioned with a negative outlook," says Gunjan Dixit, a Moody's Vice President -- Senior Credit Officer, and lead analyst for UPC.

"The business risk profile of UPC will weaken further with the announced disposal of businesses in the Czech Republic, Hungary and Romania. Although utilization of proceeds in 2019 towards debt reduction could improve credit metrics, more exposure to the increasingly competitive Swiss market could pose continued operational challenges, despite any near-term strategic M&A or partnership to accelerate fixed-mobile convergence in Switzerland," adds Ms. Dixit.

RATINGS RATIONALE

As of 30 June 2018, pro-forma for the debt repayments of around €900 million from UPC Austria's disposal, Moody's adjusted Gross Debt/ EBITDA ratio for UPC stood around 5.5x (treating Austria as discontinued and CEE businesses being sold as continued operations), still above the 5.25x threshold for downward pressure on the rating. Moody's adjusted cash flow from operations ("CFO")/ Debt ratio was 12.5% for the last twelve months ended 30 June 2018 (on a pro-forma basis). This ratio is also towards the weaker end of the Ba3 rating category. The company's free cash flow generation (defined as CFO less property and equipment additions) was also constrained due to elevated capex but could improve with asset disposals as accrued capex to sales in Switzerland and remaining CEE operations is expected to be around 18% for 2018 compared to group accrued capex of 26% in 2017.

Including vendor financing related debt (which is excluded from the covenant leverage definition), UPC's reported total net leverage was high at 4.7x as of 30 June 2018. Pro-forma for the debt repayments from Austria's disposal in Q3 2018 and treating Austria operations as discontinued, the company's total net leverage would have been similar at around 4.6x as per Moody's estimates.

Moody's recognizes that proceeds from the sale of the businesses in the Czech Republic, Hungary and Romania could be reinvested into UPC's business within 12-18 months, used for debt pre-payments in the absence of reinvestments, or up-streamed to Liberty under certain covenant carve-outs. After the asset disposals, Moody's would expect UPC to run with a tighter total reported net leverage. Failure to achieve de-leveraging towards the 4.0x total net leverage target (including vendor financing) in line with Liberty Global's stated ambition for its converged businesses (after asset disposals and any strategic M&A/ partnership to facilitate fixed-mobile convergence), could lead to negative pressure on UPC's ratings.

With the disposal of businesses in the Czech Republic, Hungary and Romania, UPC's exposure to Switzerland will increase to around 68% of overall revenues and 73% of OCF (UPC's reported measure of EBITDA). However, the company's performance in Switzerland continues to be considerably weaker than Moody's expectations, driven by heightened competition. UPC's rebased revenue in Switzerland declined by -1.6% year-on-year (y-o-y) in H1 2018, while its OCF declined drastically by -11.0% y-o-y in H1 2018 affected by higher content costs associated with the MySports Platform that was launched in Q3 2017 as well as higher interconnection costs. For 2018/19, Moody's expects revenue growth in Switzerland to remain challenged due to intense competition pressurizing OCF which will also be negatively impacted by higher content/ marketing and interconnection costs. In Poland and Slovakia, UPC has achieved very little growth of less than 1% year-on-year in revenues and OCF in H1 2018. Moody's expects only subdued growth in these markets in 2018/19.

Moody's regards UPC's liquidity provision as adequate for its near-term requirements. As of 30 June 2018, UPC reported €17.6 million of cash on hand, almost exclusively at subsidiary and intermediate holdco levels. This is complemented by €990 million of unused borrowing capacity under the company's credit facility, which is fully available for borrowing.

UPC's near term repayment obligations (largely comprising of vendor financing) were limited to €444 million (as of 30 June 2018) that fall due within one year. The next maturity of long- term third party debt does not occur before 2025. Moody's expects the company to upstream cash to its parent company through shareholder loan repayments or loan advances from time to time, while maintaining sufficient flexibility for its operational needs over the next 12 to 18 months.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook on the ratings reflects (1) the weakening business risk profile of UPC following asset disposals and the increasing exposure to the operationally challenged Swiss market, coupled with (2) high leverage and weak cash flow based metrics.

Stabilization of the outlook will be dependent upon the successful conclusion of the asset disposals and use of proceeds towards debt reduction as well as strengthening of the group's business risk profile.

WHAT COULD CHANGE THE RATING UP/DOWN

Prior to the sale of UPC Austria and the planned disposal of businesses in the Czech Republic, Hungary and Romania, Moody's said that downward ratings pressure could develop if (1) UPC failed to maintain its Moody's adjusted Gross Debt/ EBITDA ratio at below or around 5.25x on a sustained basis; and/ or (2) cash flow generation did not improve such that its Moody's adjusted CFO/ Debt ratio remains materially below 12% and its free cash flow (after capex including vendor financing repayments) remained negative on a sustained basis.

Prior to the sale of UPC Austria and the planned disposal of businesses in the Czech Republic, Hungary and Romania, Moody's said that upward pressure on the rating could develop over time if (1) UPC's operating performance improved materially and its rebased revenue growth trends to (at least) around 5% on a sustained basis; (2) its adjusted Gross Debt/ EBITDA ratio (as calculated by Moody's) fell below 4.25x on a sustained basis; and (3) its cash flow generation improved such that it achieved a Moody's adjusted CFO/ Debt ratio above 17%.

As the company's profile is in transition following these disposals, Moody's will assess the use of disposal proceeds towards debt reduction and strategic investments and could adjust the up/down rating triggers depending on the assessment of the evolution of the company's business risk and financial risk profiles.

LIST OF AFFECTED RATINGS

Outlook Actions:

..Issuer: UPC Financing Partnership

....Outlook, Remains Negative

..Issuer: UPC Holding B.V.

....Outlook, Remains Negative

..Issuer: UPCB Finance IV Limited

....Outlook, Remains Negative

..Issuer: UPCB Finance VII Limited

....Outlook, Remains Negative

Affirmations:

..Issuer: UPC Financing Partnership

....Senior Secured Bank Credit Facility, Affirmed Ba3 (LGD3)

..Issuer: UPC Holding B.V.

.... Probability of Default Rating, Affirmed Ba3-PD

.... Corporate Family Rating, Affirmed Ba3

....Senior Unsecured Regular Bond/Debenture, Affirmed B2 (LGD6)

..Issuer: UPCB Finance IV Limited

....Senior Secured Regular Bond/Debenture, Affirmed Ba3 (LGD3)

..Issuer: UPCB Finance VII Limited

....Senior Secured Regular Bond/Debenture, Affirmed Ba3 (LGD3)

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Pay Television - Cable and Direct-to-Home Satellite Operators published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

UPC, an indirect subsidiary of Liberty Global plc (Ba3 stable), is a European cable company that operates in Switzerland and in a number of Central and Eastern European countries (Poland, Hungary, the Czech Republic, Romania and Slovakia). For the last twelve months ended 30 June 2018, the company generated €1.7 billion in revenues and €900 million in reported OCF from continuing operations.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gunjan Dixit
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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