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Rating Action:

Moody's changes outlook on VodafoneZiggo's ratings to negative

20 Sep 2018

London, 20 September 2018 -- Moody's Investors Service ("Moody's"), has today changed the outlook on VodafoneZiggo Group BV's ('VZ', or 'the company') ratings to negative from stable. At the same time, the agency has affirmed VZ's B1 corporate family rating (CFR), B1-PD probability of default rating (PDR) as well as the company's and its subsidiaries' existing B1 senior secured debt instrument ratings and B3 unsecured debt instrument ratings.

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

Moody's decision to change VZ's ratings outlook to negative reflects (1) the company's high leverage of over 6.0x as calculated by Moody's, which has been above the threshold for the B1 rating category since end of 2017; (2) the continued aggressive shareholder returns which lead to negative free cash flow generation as calculated by Moody's (cash flow from operations (CFO) less property and equipment (P&E) additions and dividends); and (3) the tough competitive environment and new EU roaming regulations introduced in June 2017 which will result in only stable operating cash flow (OCF; company's measure of EBITDA) performance in 2018 despite the realization of some synergies from the integration process.

"We do not expect a meaningful improvement in VZ's OCF before 2020/2021 due to continued restructuring charges, despite realization of synergies, and the intense competition in the Dutch mobile market," says Gunjan Dixit, Moody's Vice President -- Senior Credit Officer, and lead analyst for VZ. "Credit metrics will remain weak over the next 12-18 months and de-leveraging will be limited if there is no debt reduction and aggressive shareholder returns continue," adds Ms. Dixit.

RATINGS RATIONALE

While the cable operations of VZ are broadly stable, its mobile operations are struggling meaningfully. Mobile revenues from consumer business fell by 5.9% to €416.3 million (under Old GAAP -- prior to the implementation of ASU 2014-09) for the first half of 2018, while those from business customers dropped by 14.7% to €267.6 million. Net SIM losses across both post-pay and pre-pay were over 31,000 in the six months to June 2018. Further, the ARPU of post-pay customers, who account for 80% of the JV's total mobile subscriber base, has fallen from €23 in Q2 2017 to €19 in Q2 2018. A multitude of factors are responsible for the poor performance of mobile, including roaming regulation and price competition, particularly in the business market. Nevertheless, the take-up of the converged offers remains positive. Moody's expects overall revenue growth to remain subdued in 2018/19 particularly due to the challenging market conditions for the mobile operations.

VZ expects its reported OCF (under Old GAAP) to be stable at €1.7 billion in 2018. Apart from the effect of revenue declines, OCF growth in 2018 will be constrained by €25 million of operating restructuring charges associated with the integration of the businesses. Moody's recognizes that the integration process remains on track and expects the restructuring charges to still be material in 2019/20 negatively affecting OCF growth, although offset by the realization of synergies.

As of 30 June 2018, the company reported third party debt of €10.8 billion compared to €10.5 billion at the end of 2017, largely driven by the increase in vendor finance related debt.

VZ's financial policy is to manage covenant leverage between 4.5x and 5.0x and to distribute excess cash to shareholders. The covenant leverage ratio stood at 4.82x as of 30 June 2018. The corresponding Moody's-adjusted gross leverage ratio at 6.2x (under Old GAAP) for the last twelve months (LTM) ended 30 June 2018 is therefore meaningfully higher than the company's reported leverage. In addition, Moody's expects limited de-leveraging over the next 12-18 months in the absence of any debt reduction.

Moody's adjusted CFO/ Debt ratio for VZ is weak at around 9.8% for the LTM period ended 30 June 2018, and Moody's does not expect it to materially improve in the next 12-18 months. The company has a fairly aggressive shareholder remuneration policy and will be paying around €800 million in cash returns in 2018 (of which €225 million has already been paid), which will constrain Moody's calculated free cash flow in addition to the adjustment that Moody's makes for vendor financing P&E additions to capex. Moody's adjusted free cash flow/ debt ratio for VZ continued to be negative at around -1.7% for the LTM period ended 30 June 2018.

Substantial shareholder returns in 2019/20 may imply continued constrained Moody's adjusted free cash flow generation over the next few years. Nevertheless, Moody's currently expects the company to manage its future shareholder remuneration in order to allow for capex requirements (besides normal business needs) which may arise when the national frequency auction of 4G/5G mobile spectrum in the 700MHz, 1400MHz and 2100MHz bands takes place in 2019.

VZ's ratings are nevertheless supported by its strong underlying business risk profile. The joint venture brings together a 92% population coverage of high-speed DOCISIS 3.0 enabled cable network with the country's second-largest mobile player. This makes VZ and Koninklijke KPN N.V. (KPN, Baa3 stable) as best placed to pursue convergence and to benefit from cross-selling opportunities.

Moody's views VZ's liquidity position as adequate. As of 30 June 2018, the company had €800 million of undrawn revolving credit facilities available. At the same time, the company had a significant cash balance of €355 million on the balance sheet, although Moody's expects a large proportion of this to be used for shareholder returns. VZ's near term obligations are limited mainly to vendor finance-related obligations of around €922.4 million falling due in the next 12 months which Moody's expects VZ to fund largely from internally generated cash flows. Although currently not a concern for the company, Moody's continues to monitor the growing nature of the programme. The next material bond maturity does not occur before 2024 and the average tenor of third party financial debt is 7.2 years.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook on VZ reflects the risk that leverage for the company may continue to remain high for a prolonged period should aggressive shareholder returns continue and the market conditions remain tough. While realization of synergies should support EBITDA generation, visible benefit from that would not be evident before 2020/21.

Stabilization of the outlook will require (1) Moody's adjusted Gross Debt/ EBITDA ratio for VZ trending sustainably below 6.0x; (2) integration process remaining on track leading to timely realization of operational synergies; and (3) gradual improvement in market conditions leading to a better operating performance for VZ.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward ratings pressure could develop if (1) VZ's operating performance improves meaningfully with the timely realization of synergies and the eventual upside from convergent opportunities; (2) its adjusted Gross Debt/ EBITDA ratio (as calculated by Moody's) falls below 5.5x on a sustained basis and (3) its cash flow generation improves such that it achieves a Moody's adjusted CFO/ Debt ratio trending towards 14%. Positive Moody's adjusted FCF will also support upward ratings pressure.

Downward pressure on the ratings is likely if (1) the operating performance of the group weakens meaningfully on a sustained basis due to intense competition in the market; (2) the business fails to deliver the promised synergies on a timely basis; and/ or (3) Moody's adjusted Gross Debt/ EBITDA ratio remains above 6.0x and CFO/ Debt falls below 8% on a sustained basis. Increasingly negative FCF (Moody's adjusted) could also put downward pressure on the ratings.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: VodafoneZiggo Group B.V.

.... Probability of Default Rating, Affirmed B1-PD

.... Corporate Family Rating, Affirmed B1

..Issuer: LGE HoldCo VI B.V.

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed B3

..Issuer: Ziggo B.V.

....Backed Senior Secured Bank Credit Facility, Affirmed B1

....Backed Senior Secured Regular Bond/Debenture, Affirmed B1

..Issuer: Ziggo Bond Finance B.V.

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed B3

..Issuer: Ziggo Secured Finance B.V.

....Senior Secured Bank Credit Facility, Affirmed B1

....Backed Senior Secured Regular Bond/Debenture, Affirmed B1

....Senior Secured Regular Bond/Debenture, Affirmed B1

..Issuer: Ziggo Secured Finance Partnership

....Senior Secured Bank Credit Facility, Affirmed B1

Outlook Actions:

..Issuer: VodafoneZiggo Group B.V.

....Outlook, Changed To Negative From Stable

..Issuer: LGE HoldCo VI B.V.

....Outlook, No Outlook

..Issuer: Ziggo B.V.

....Outlook, Changed To Negative From Stable

..Issuer: Ziggo Bond Finance B.V.

....Outlook, Changed To Negative From Stable

..Issuer: Ziggo Secured Finance B.V.

....Outlook, Changed To Negative From Stable

..Issuer: Ziggo Secured Finance Partnership

....Outlook, Changed To Negative From Stable

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.

VodafoneZiggo Group B.V., is a 50%-50% JV owned by Liberty Global plc (Liberty, Ba3 stable) and Vodafone Group plc (Vodafone, Baa1 on review for downgrade) created in December 2016. It generated revenue of €4.0 billion and OCF of €1.7 billion for the financial year ended 31 December 2017.

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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