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Rating Action:

Moody's downgrades Vodafone to Baa2; negative outlook

26 Feb 2019

Madrid, February 26, 2019 -- Moody's Investors Service ("Moody's") has today downgraded Vodafone Group Plc's ("Vodafone" or "the company") senior unsecured ratings to Baa2 from Baa1, the senior unsecured MTN and shelf ratings to (P)Baa2 from (P)Baa1, and the subordinated hybrid notes rating to Ba1 from Baa3. Concurrently, Moody's has affirmed the company's Prime-2 (P-2) short term rating. The outlook is negative.

The rating action concludes the review for downgrade initiated on 11 May 2018, following the company's announcement of the proposed acquisition of Unitymedia GmbH ("Unitymedia"), the German cable operator owned by Liberty Global plc ("Liberty"), and the Central and Eastern European ("CEE") assets of Liberty's subsidiary, UPC Holding BV, for an enterprise value (EV) of EUR18.4 billion.

"Vodafone has been weakly positioned in the Baa1 rating category for several years. The downgrade to Baa2 reflects our expectation that Vodafone's already high leverage will weaken further, even before the proposed acquisition of Liberty's assets, driven by higher-than-expected spectrum investments and slower EBITDA growth. We see Vodafone's adjusted debt/EBITDA pre-transaction weakening to around 3.2x in the next two years, well above the 2.75x rating threshold for the Baa1 rating," says Laura Perez, Moody's Vice President -- Senior Credit Officer and lead analyst for Vodafone.

"When we consider the impact of the proposed acquisition of certain Liberty's assets, the company's adjusted gross leverage (as defined by Moody's) will further weaken to 3.6x by fiscal 2020, excluding potential de-leveraging initiatives. 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. We believe that the company will take measures to accelerate deleveraging and bring metrics in line with the parameters for the Baa2 rating to preserve its financial flexibility, while meeting its reported 2.5x-3x target net leverage," adds Mrs Perez.

A full list of affected ratings is provided at the end of the press release.

RATINGS RATIONALE

Moody's expects Vodafone's underlying EBITDA growth (excluding the impact of UK handset financing and at constant foreign currency rates) to slow to around 3% in the next two years, which is lower than what Moody's had assumed when the rating was placed on review for downgrade in May 2018. In addition, the company has so far spent more on spectrum than the rating agency had anticipated at the time.

The main drivers of the slowdown are intensified competition in Spain and in Italy, as well as a more challenging operating environment in South Africa. Moody's expects the company's EBITDA growth to be mainly supported by accelerating net cost savings of EUR1.2 billion over the next two years.

With slower growth and higher leverage owing to spectrum investments, Vodafone's credit metrics are no longer commensurate with a Baa1 rating. In addition, following the completion of the acquisition of certain Liberty's assets, Moody's expects Vodafone's pro-forma adjusted leverage will peak at 3.6x in fiscal 2020, and gradually trend towards 3.3x in fiscal 2022, based on more conservative cost synergy assumptions in fiscal 2020 than Vodafone's announced targets. The company's proposed acquisition is expected to complete in mid-2019, although Moody's believes that regulatory approval remains uncertain given previous failed attempts at cable consolidation in Germany.

Vodafone generates limited free cash flow after dividends. The rating agency expects the company's dividend to represent a high 70% of its free cash flow in fiscal 2020 (before dividend payments and as defined by Moody's). Limited free cash flow generation and upcoming 5G spectrum investments will likely lead to a slow organic deleveraging path, unless the company takes actions to strengthen its balance sheet.

Moody's believes the deterioration in Vodafone's leverage resulting from its proposed acquisition more than offsets the improvements in its business. The strategic acquisition signaled a change in Vodafone's financial policy, with the company's target net leverage range (as defined by Vodafone) increasing from 2x-2.5x to 2.5x-3.0x.

The acquisition will be partly funded with hybrid debt (EUR4.2bn worth of hybrids raised to date with Moody's assigning a 50% equity credit) and mandatory convertibles, which in the past have included equity credit and could get equity credit going forward depending on the final documentation. However, Moody's notes that there is no straight equity funding raised for a strategic acquisition.

Vodafone's Baa2 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.

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. Vodafone's ratings will be weakly positioned in the Baa2 rating category for the next two years on completion of its acquisition, with no headroom for deviation from Moody's expectations, unless the company takes additional actions to preserve its financial flexibility within the stated guidance for the Baa2 category.

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. Moody's believes management can take measures to accelerate deleveraging, such as potential asset disposals. However, these measures are yet to be executed at a time when the rating agency expects weak credit metrics for the Baa2 rating category.

WHAT COULD CHANGE THE RATING UP / DOWN

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 3.6x 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.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Vodafone Group Plc

....Senior Unsecured Commercial Paper, Affirmed P-2

Downgrades:

..Issuer: Vodafone Group Plc

....Junior Subordinated Regular Bond/Debenture, Downgraded to Ba1 from Baa3

....Senior Unsecured Shelf, Downgraded to (P)Baa2 from (P)Baa1

....Senior Unsecured Conv./Exch. Bond/Debenture, Downgraded to Baa2 from Baa1

....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa2 from (P)Baa1

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1

Outlook Actions:

..Issuer: Vodafone Group Plc

....Outlook, Changed To Negative From Rating Under Review

PRINCIPLE 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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