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Rating Action:

Moody's assigns first time ratings (CFR at B2) to Musketeer GmbH (KBW); rating outlook is stable

Global Credit Research - 23 Mar 2011

London, 23 March 2011 -- Moody's Investors Service has today assigned a B2 corporate family rating (CFR) and probability-of-default rating (PDR) to Musketeer GmbH ('Musketeer'), the parent of Kabel BW Erste Beteiligungs GmbH ('KBW' or 'the company'). At the same time, Moody's has assigned provisional ratings to the following debt instruments of the different group entities:

- EUR 1.57 billion (in a combination of euro and U.S. dollars) worth of senior secured notes due 2019 and senior secured floating rate notes due 2018 to be issued by Kabel BW Erste Beteiligungs GbmH and Kabel Baden-Wuttemberg GmbH & Co. KG: (P)B1

- EUR 680 million of senior notes due 2021 to be issued by Musketeer GmbH: (P)Caa1

The outlook for all the ratings is stable. This is the first time that Moody's has assigned ratings to Musketeer. Moody's notes that following completion of the planned post debt-issuance re-organization process, Kabel BW Holdings will assume all the debt obligations of Kabel BW Erste Beteiligungs GbmH and Kabel Baden-Wuttemberg GmbH & Co. KG to become the sole issuer of the senior secured notes as well as the RCF.

RATINGS RATIONALE

"The B2 CFR reflects the weak post deal credit metrics for Musketeer, mitigated by the strength of KBW's business risk profile," says Gunjan Dixit, Moody's lead analyst for Musketeer.

The acquisition of KBW by Liberty Global ('LGI') was announced on 21 March 2010 and values the company at EUR3.16 billion, excluding transaction costs (8.1x 2011 EBITDA including synergies -- as estimated by LGI). The deal is subject to regulatory approval and is expected to close in the second half of 2011.

EQT Funds IV and V ('EQT'), the current owners of KBW will be re-capitalizing the company with EUR 2.25 billion of new debt. This will fund financing fees of EUR 60 million, refinance KBW's existing debt (EUR 1.18 billion) and repay most of a shareholder loan from EQT (EUR 1.0 billion). Post this repayment, a residual amount of EUR 100 million will remain outstanding under this loan, which Moody's has treated as debt within its credit metrics for Musketeer. Musketeer's capital structure is complemented by common equity. Moody's notes that Musketeer will have cash and cash equivalents of EUR 105 million post closing of the transaction.

The new capital structure is expected to be assumed by LGI upon completion of the transaction. Once the regulatory approval is obtained, LGI will pay EUR 910 million as final acquisition consideration to EQT and thereafter gain complete control of KBW. Once the transaction is consummated by LGI, UPC Germany HoldCo 1 GmbH (a subsidiary of LGI), would assume the obligations of Musketeer GmbH as the issuer of senior notes and would become the ultimate holding company for KBW. At that stage, Moody's would expect to move its CFR to UPC Germany HoldCo 1.

Should the LGI acquisition not be consummated, Aldermanbury Investments Limited, a subsidiary of JP Morgan Chase & Co. (the 'Backstop Purchaser') has agreed to assume rights and obligations of the purchaser (LGI) under the sale and purchase agreement subject to the terms defined in the indenture. In such a situation, the Backstop purchaser expects to sell or otherwise transfer Musketeer ('Backstop Transfer') to any other purchaser subject to certain conditions. In addition, if the Acquisition Agreement is terminated after the receipt of the Regulatory Failure Notice prior to the consummation of the Backstop Acquisition, EQT will be permitted to, subject to certain conditions, sell or transfer (the ''EQT Transfer'') Musketeer to any other purchaser. Moody's notes that no change of control would be triggered under the indenture for the newly issued bonds upon the consummation of the acquisition by LGI, or the Backstop Acquisition, the Backstop Transfer or the EQT Transfer, provided that in connection with the Backstop Transfer and the EQT Transfer, if the consolidated net leverage (as defined in the indenture) of the Senior Notes Issuer and its restricted subsidiaries is 6.25 to 1.00 or less at the time of such transaction giving pro forma effect thereto.

Moody's ratings reflect (i) the modest scale of KBW's revenues relative to rated peers; (ii) high pro-forma leverage of the company based on 2010 year-end EBITDA; and (iii) de-leveraging in the near term remaining largely a function of EBITDA growth, in the absence of amortizing debt. Positively, the ratings take into account (i) KBW's good market position as a provider of cable television, broadband and telephony services in the Baden-Württemberg region; (ii) the company's continued robust operating performance; (iii) the competitive advantage offered by its advanced network offering good potential for further growth; (iv) its solid EBITDA margins translating into positive free cash flow generation.

The Baden-Württemberg ("BW") region offers a good and growing market to KBW with approximately 5 million households. The company already has a sizeable network in the region which has been fully upgraded to DOCSIS 3.0 standard. In this regard, Moody's notes that KBW is currently ahead of its German peers in terms of network upgrade. In Moody's opinion, KBW remains well positioned to benefit from increased demand over the short to medium term for its "bundled" products, with the introduction of "next-generation" digital TV and faster-speed broadband services being facilitated by DOCSIS 3.0 technology.

Over the past five years, KBW's reported revenues have grown at a CAGR of approximately 18%. During 2010, revenues of the company increased by 14% driven by the largely resilient and recurring nature of its revenues from its Basic Cable Services (BCS) segment (including carriage fees) which accounts for approximately 53% of total revenues as well as the good growth in the revenues from Internet & Telephony services (37% of total revenues). KBW increased its EBITDA margin to 56% in 2010 after 52.7% in 2009. Given that Moody's expects KBW's EBITDA to grow consistently in 2011 and beyond, Moody's ratings currently are based on the expectation that Musketeer's leverage will improve to approximately 6.3x Gross Debt/EBITDA (as adjusted by Moody's) by the end of 2011.

While Moody's believes that Internet & Telephony followed by BCS revenues should continue to be the key growth driver for the company over the medium term, building presence in the Pay TV, Mobile and B2B services overtime, may still prove relatively challenging to KBW given (i) the wealth of quality content already available on Free to Air (FTA) broadcasting in Germany thereby to some extent undermining the take-up of Pay TV in the country; (ii) competitive pressures in the mobile services segment; and (iii) the lack of track record of KBW in providing B2B services.

Reduction in leverage on a Gross Debt to EBITDA (as adjusted by Moody's) of well below 6.0x; track-record of positive free cash flow generation and conservative financial strategy could lead to upward rating pressure. On the contrary, downward rating pressure could develop with an increase in leverage above 7.0x Gross Debt to EBITDA (as adjusted by Moody's) and/or material negative free cash flow on a sustained basis.

The (P)B1 rating of the senior secured bonds is one notch higher than the CFR cushioned by the presence of senior unsecured notes in the capital structure. The Super-Senior RCF ranks ahead of the Senior Secured Notes in the debt waterfall reflecting its priority of payment from enforcement proceeds. The (P)Caa1 rating of the senior unsecured notes is a result of Musketeer's high leverage and their contractually and structurally subordinated position relative to the company's RCF and senior secured bonds. Moody's notes that the debt incurrence test for the senior notes has been set at 5.0x consolidated leverage ratio and 4.0x senior secured leverage ratio. The RCF is constricted by a leverage based maintenance covenant and we would expect Musketeer to maintain adequate headroom under the covenant at all times.

Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect the rating agency's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the revolving credit facility and the notes. A definitive rating may differ from a provisional rating.

The principal methodologies used in this rating were Global Cable Television Industry published in July 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Musketeer GmbH, is the ultimate holding company for KBW, which is the third largest cable operator in the Germany with revenues (including other operating income) of EUR 563.4 million in 2010.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

London
Gunjan Dixit
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Chetan Modi
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
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SUBSCRIBERS: 44 20 7772 5454

Moody's assigns first time ratings (CFR at B2) to Musketeer GmbH (KBW); rating outlook is stable
No Related Data.
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