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Rating Action:

Moody's assigns Ba1 ratings to Vodafone's new hybrid securities; outlook negative

04 Apr 2019

Madrid, April 04, 2019 -- Moody's Investors Service ("Moody's") has today assigned a Ba1 rating to Vodafone Group Plc's (Vodafone) issuance of USD 2 billion subordinated fixed rate reset 10 year capital securities due 2079. The outlook is negative.

Vodafone plans to use the hybrid securities to fund a portion of the EUR 18.4 billion acquisition of Liberty Global plc's (Ba3 stable) assets in Germany and Central and Eastern Europe (CEE).

"The Ba1 ratings we have assigned to the hybrid securities is two notches below Vodafone's senior unsecured rating of Baa2, primarily because the instrument is deeply subordinated to other debt in the company's capital structure," says Laura Perez, a Moody's VP - Senior Credit Officer and lead analyst for Vodafone.

RATINGS RATIONALE

The Ba1 rating assigned to the hybrid securities is two notches below the group's senior unsecured rating of Baa2.

The two-notch rating differential reflects the deeply subordinated nature of the hybrid instruments. The instrument: (1) is long dated, with a maturity of 60 years; (2) is senior only to common equity and ranks pari passu with the existing euro-equivalent 4 billion hybrid securities and the existing euro-equivalent 4 billion mandatory convertible; (3) provides Vodafone with the option to defer coupons on a cumulative basis; (4) steps up the coupon by 25 basis points (bps) from 2029, and an additional 75 bps in year 2049; (5) steps up the coupon by 500 bps upon the occurrence of a change of control event; and (6) Vodafone must come current on any deferred interest if there are any payments on parity or junior instruments.

In Moody's view, the notes have equity-like features that allow them to receive basket "C" treatment, i.e., 50% equity and 50% debt for financial leverage purposes (please refer to Moody's Hybrid Equity Credit methodology published in September 2018).

Vodafone's Baa2 senior unsecured rating reflects its large size and the benefits of its broad geographical diversification with strong market positions in a number of countries; its convergence strategy to grow its fixed broadband assets in Europe; but also the relatively high leverage for the rating category.

Moody's expects Vodafone's adjusted leverage (as defined by Moody's) to weaken to 3.8x-3.6x over the next two years following the completion of its acquisition of certain Liberty's assets. This leverage is high for the rating category, and positions Vodafone weakly at the Baa2 rating level, with a negative outlook and with no headroom for underperformance. Moody's believes management can take measures to accelerate deleveraging, such as potential asset disposals.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects the deterioration in Vodafone's leverage metrics on completion of the proposed acquisition of certain Liberty's assets. The outlook on the rating could be stabilized if Vodafone implemented actions to strengthen its balance sheet and accelerate its deleveraging path over the next 12-18 months such that its adjusted debt to EBITDA stays below 3.3x on a sustained basis.

WHAT COULD CHANGE THE RATING UP/DOWN

As the hybrid securities rating is positioned relative to another rating of Vodafone, either (1) a change in Vodafone's senior unsecured rating; or (2) a re-evaluation of its relative notching could affect the hybrid securities rating.

The rating could be under downward pressure if following the acquisition of Liberty's assets, which Moody's estimates could increase Vodafone's adjusted leverage to 3.8x by fiscal 2020, Vodafone fails to improve credit metrics to levels in line with the Baa2 category, such as adjusted debt/EBITDA below 3.3x, and RCF/Net debt above 18% on a sustained basis.

Given the negative outlook, there is currently no upward pressure on the rating. Over the long term, Vodafone's rating could come under upward pressure if Vodafone sustainably improves its underlying revenue and operating performance leading to stronger debt protection ratios, such as adjusted debt/EBITDA falling below 2.75x and adjusted retained cash flow (RCF)/net debt consistently exceeding 25% on a sustained basis.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Vodafone Group Plc (Vodafone) is one of the world's largest telecommunications operators. The company provides mobile services in 22 countries and fixed services in 15 of these countries. In addition, the company operates joint ventures and associates, taking its total presence to 25 countries. Vodafone's main European markets are Germany, Italy, the UK and Spain, which accounted for around 63% of group revenue for the 12 months ended September 2018. In the 12 months ended September 2018, the company generated revenue of EUR46 billion and adjusted EBITDA of EUR14.4 billion.

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.

Laura Perez Martinez
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
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 Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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