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Rating Action:

Moody's assigns a Ba3 CFR to the Virgin Media O2 joint venture; stable outlook

08 Sep 2020

London, 08 September 2020 -- Moody's Investors Service, ("Moody's") has today assigned a Ba3 corporate family rating (CFR) and Ba3-PD probability of default rating (PDR) to VMED O2 UK Limited (Virgin Media O2). Concurrently Moody's has assigned a Ba3 instrument rating to the new GBP2.45 billion (equivalent) senior secured notes due 2031 (except for GBP tranche due 2029) to be issued by VMED O2 UK Financing I plc, to the new GBP1.5 billion term loan A (Facility P) due 2026 to be raised by VMED O2 UK Holdco 4 Limited, and to the GBP1.75 billion (equivalent) Term Loan B to be split into a Facility Q and a Facility R due 2029 to be raised by Virgin Media Bristol LLC and VMED O2 UK Holdco 4 Limited, respectively, all entities being subsidiaries of VMED O2 UK Limited. The outlook on the ratings is stable.

Moody's has affirmed all the ratings of Virgin Media Inc. and its subsidiaries with the exception of the vendor financing notes raised by Virgin Media VFN IV DAC and Virgin Media Vendor Financing Notes III. Moody's has downgraded the the vendor financing notes issued by Virgin Media VFN IV DAC and Virgin Media Vendor Financing Notes III to B2 from B1. The outlook on all the ratings of Virgin Media Inc. and its subsidiaries has been changed to stable from negative.

On May 7, 2020, Liberty Global plc (Liberty Global) (Ba3 stable) and Telefonica S.A. (Telefonica) (Baa3 stable) announced that they entered into an agreement to form a 50:50 joint venture combining the UK's operations of Virgin Media Inc. with O2 Holdings Limited. Virgin Media Inc.'s operations in Ireland will thus not be a part of the joint venture. VMED O2 UK Limited. will be the consolidating and reporting entity of the joint venture. The joint venture transaction will not constitute a change of control under Virgin Media Inc.'s existing indebtedness which will be contributed to the joint venture. O2 Holdings Limited will be contributed by Telefonica into the joint venture debt-free. The joint venture will use the proceeds from the issuance of the new instruments to pay dividends to its shareholders. However the proceeds from the senior secured notes will be placed into escrow and the new term loans will remain undrawn until the completion of the joint venture which is subject to regulatory approval, including competition clearance approval by the European Commission and, if applicable, the merger control authorities of the U.K. It is anticipated that the joint venture will close around the middle of 2021. Neither Telefonica nor Liberty Global will consolidate the joint venture after the closing.

RATINGS RATIONALE

Virgin Media O2's Ba3 CFR reflects (1) the large scale of the joint venture which creates a fully converged fixed and mobile communications operator in the UK to compete more effectively with incumbent BT Group Plc (rated under British Telecommunications Plc [Baa2 negative] and EE Limited [Baa2 negative]), (2) the good quality of the joint venture's fixed and mobile networks, (3) the significant cost and capital expenditures savings and revenue synergies to be realized from the merger of Virgin Media and O2, and (4) the good liquidity of the joint venture supported by a large undrawn revolving credit facility and increasing cash flow generation before dividends driven by a lower capital intensity at Virgin Media.

However the rating is constrained by (1) Virgin Media O2's high net leverage at 5.0x pro forma for the transaction (based on debt structure as of 30 June 2020 and last twelve months pro forma EBITDA as of 31 December 2019 as reported by the company including vendor financing but excluding off-balance sheet securitization programmes at Virgin Media and O2), which is comparable to the adjusted gross leverage as calculated by Moody's, (2) limited de-leveraging prospects based on Moody's assumption that the joint venture will maintain its net leverage at close to the higher end of its 4.0x-5.0x target net leverage ratio to maximize distributions to the parents through recapitalizations subject to market and operating conditions, and (3) the highly competitive nature of the UK telecom market and the increased pressure over the medium-term from the rollout of fibre by the incumbent and alternative network providers which will constrain revenue growth at low single-digit rates over the medium-term.

The affirmation of the existing ratings of Virgin Media Inc. and its subsidiaries (except for the vendor financing notes issued by Virgin Media VFN IV DAC and Virgin Media Vendor Financing Notes III) and the change in the outlook to stable reflects Moody's expectation that the transaction will close and the existing rated facilities will be contributed to the joint venture which will lead to a de-leveraging of the joint venture compared to Virgin Media Inc. on a standalone basis. The downgrade of the vendor financing notes reflects the increased amount of senior secured debt ranking ahead pro forma for the closing of the joint venture.

Upon the closing of the joint venture, Moody's expects to withdraw the CFR and PDR on Virgin Media Inc.

Although the coronavirus outbreak will have a relatively limited impact on Virgin Media and O2, it will contribute to a modest decline in revenue and EBITDA for the combined group in 2020 before a stabilization in 2021 and a return to moderate revenue growth from 2022. Virgin Media (including Irish operations) reported a decline in rebased revenue of 2.1% in the first six months of 2020 compared to the same period last year after having experienced only a modest rebased revenue growth of 0.4% in 2019. O2's total revenue declined by 1.1% in the first six months of 2020 due to the impact of COVID-19 resulting in a significant lockdown-related decline in Smart Metering Implementation Programme installations and mobile revenues. Despite the modest projected revenue growth beyond 2021, Moody's forecasts a strong growth in EBITDA supported by the GBP540 million synergy estimate comprised of approximately GBP350 million of cost savings, GBP80 million of capital expenditure synergies and GBP110 million of revenue synergies. Management has estimated GBP700 million in integration and restructuring costs to deliver those synergies.

The rating also takes into account the following environmental, social and governance (ESG) considerations. From a corporate governance perspective, in addition to the high level of leverage at which Virgin Media O2 will operate, Moody's considers that the delivery of the strategy of the joint venture is subject to execution risk given the untested nature of the collaboration between Liberty Global and Telefonica in a joint control environment.

Moody's considers that Virgin Media O2 will benefit from an adequate liquidity position supported by a large GBP1.0 billion revolving credit facility which will be undrawn at the closing of the transaction and will mitigate the projected modest cash balance within the group. The joint venture will also enjoy a long-dated maturity profile with no significant debt maturing before 2025. Cash flow will be increasing over the medium-term as the joint venture realizes the synergies while capital intensity at Virgin Media will decrease following the upgrade of its DOCSIS network to speeds of up to 1 Gbps. While Moody's assumes that all of the excess cash flow will be up-streamed to Liberty Global and Telefonica, the rating agency also considers that it represents a buffer to support de-leveraging in a situation of pressure on EBITDA.

STRUCTURAL CONSIDERATIONS

Virgin Media O2's and Virgin Media Inc.'s PDR of Ba3-PD is at the same level as the company's CFR, reflecting the expected recovery rate of 50%, which we typically assume for a capital structure that consists of a mix of bank credit facilities and bond debt.

The new senior secured notes will be issued by VMED O2 UK Financing I plc, which will sit outside of the bank and restricted groups as determined in the Virgin Media's credit facility agreement and indentures governing Virgin Media's existing senior secured notes and senior notes which will be contributed into the joint venture. The proceeds from the issuance of the new senior secured notes will be used by the issuer to fund Finco loans to be borrowed by VMED O2 UK Holdco 4 Limited, a new entity set up within the bank group under the Virgin Media credit facility. The issuer of the new senior secured notes will thus accede as a Virgin Media credit facility lender under the Virgin Media credit facility and the new Finco loans. The new Finco loans will be guaranteed on a senior secured basis by the Virgin Media credit facility guarantors and secured on a pari passu basis with all other outstanding loans under the Virgin Media credit facility by all of the assets of the bank group. The new term loans A and B will be raised by VMED O2 UK Holdco 4 Limited and Virgin Media Bristol LLC. The Ba3 instrument rating for the new senior secured notes reflects their pari passu ranking through the Finco loans with the new term loans A and B and existing Virgin Media's credit facilities and senior secured notes. These instruments rank senior to Virgin Media's existing vendor financing notes and senior notes, both rated B2.

RATING OUTLOOK

The stable outlook assumes the successful integration of the business, with timely delivery of the expected synergies while the integration costs will be contained within the envelope estimated by management, and the joint venture's financial policy to maintain net leverage (as reported by the company) between 4.0x to 5.0x. If the transaction was to fail, Moody's would reassess the rating positioning of Virgin Media Inc. on a standalone basis.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Downward pressure on the ratings is likely if (1) the operating performance of the combined business weakens meaningfully during the integration process due to intense competition in the market; (2) the combined business fails to deliver the promised synergies on a timely basis or integration costs are significantly larger than expected; and/ or (3) Moody's adjusted Gross Debt/ EBITDA ratio moves above 5.25x on a sustained basis.

Positive ratings pressure could develop over time if Virgin Media O2 deliver a strong operating performance and solid revenue growth while maintaining a conservative financial policy, such that leverage, as measured by the Gross Debt/EBITDA ratio (as adjusted by Moody's) falls towards 4.25x on a sustainable basis.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Virgin Media provides video, broadband internet and fixed-line telephony services in the U.K. over its cable network and mobile services as a mobile virtual network operator (MVNO). The Virgin Media Group's revenue and Segment Adjusted EBITDA was GBP4.8 billion and GBP2.0 billion, respectively, for the year ended December 31, 2019. O2 Holdings is the U.K.'s largest mobile network. The O2 Group's revenue and operating income before depreciation and amortisation (OIBDA) was GBP6.2 billion and GBP1.8 billion, respectively, for the year ended December 31, 2019.

Downgrades:

..Issuer: Virgin Media Vendor Financing Notes III

....Senior Secured Regular Bond/Debenture, Downgraded to B2 from B1

..Issuer: Virgin Media VFN IV DAC

....Senior Secured Regular Bond/Debenture, Downgraded to B2 from B1

Assignments:

..Issuer: Virgin Media Bristol LLC

....Senior Secured Bank Credit Facility, Assigned Ba3

..Issuer: VMED O2 UK Financing I plc

....Senior Secured Regular Bond/Debenture, Assigned Ba3

..Issuer: VMED O2 UK Holdco 4 Limited

....Senior Secured Bank Credit Facility, Assigned Ba3

..Issuer: VMED O2 UK Limited

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

.... Corporate Family Rating, Assigned Ba3

Affirmations:

..Issuer: Virgin Media Bristol LLC

....Senior Secured Bank Credit Facility, Affirmed Ba3

..Issuer: Virgin Media Finance PLC

....Senior Unsecured Regular Bond/Debenture, Affirmed B2

..Issuer: Virgin Media Inc.

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

.... Corporate Family Rating, Affirmed Ba3

..Issuer: Virgin Media Investment Holdings Ltd

....Senior Secured Bank Credit Facility, Affirmed Ba3

..Issuer: Virgin Media Secured Finance PLC

....Senior Secured Regular Bond/Debenture, Affirmed Ba3

..Issuer: Virgin Media SFA Finance Limited

....Senior Secured Bank Credit Facility, Affirmed Ba3

Outlook Actions:

..Issuer: Virgin Media Bristol LLC

....Outlook, Changed To Stable From Negative

..Issuer: Virgin Media Finance PLC

....Outlook, Changed To Stable From Negative

..Issuer: Virgin Media Inc.

....Outlook, Changed To Stable From Negative

..Issuer: Virgin Media Investment Holdings Ltd

....Outlook, Changed To Stable From Negative

..Issuer: Virgin Media Secured Finance PLC

....Outlook, Changed To Stable From Negative

..Issuer: Virgin Media SFA Finance Limited

....Outlook, Changed To Stable From Negative

..Issuer: Virgin Media Vendor Financing Notes III

....Outlook, Changed To Stable From Negative

..Issuer: Virgin Media VFN IV DAC

....Outlook, Changed To Stable From Negative

..Issuer: VMED O2 UK Financing I plc

....Outlook, Assigned Stable

..Issuer: VMED O2 UK Holdco 4 Limited

....Outlook, Assigned Stable

..Issuer: VMED O2 UK Limited

....Outlook, Assigned Stable

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

Sebastien Cieniewski
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

Peter Firth
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.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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