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Rating Action:

Moody's places Unitymedia's ratings under review for upgrade

11 May 2018

London, 11 May 2018 -- Moody's Investors Service ("Moody's") has today placed under review for upgrade the B1 corporate family rating (CFR), B1-PD probability of default rating (PDR) and the B3 senior unsecured debt ratings at Unitymedia GmbH ("UM"; the top-most entity of the ring-fenced group) as well as the Ba3 senior secured debt ratings at its 100% owned subsidiaries, Unitymedia Finance LLC and Unitymedia Hessen GmbH & Co. KG.

The review follows the announcement by Liberty Global plc ("Liberty", Ba3 stable), parent of UM, regarding the proposed disposal of UM, and the Central and Eastern European assets of Liberty's subsidiary, UPC Holding BV (Ba3, negative) to Vodafone Group plc for a combined enterprise value of €18.4 billion at an EV/adjusted segment operating cash flow (OCF) multiple of around 11.5x on an EU-IFRS basis.

"We are placing UM's ratings on review for upgrade because, if the disposal concludes as planned, UM will become part of Vodafone, a larger integrated telecoms group. In addition, part of its existing debt is expected to be repaid, leading to a reduction in UM's leverage," says Gunjan Dixit, a Moody's Vice President -- Senior Credit Officer and lead analyst for UM.

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

RATINGS RATIONALE

The review for upgrade acknowledges that Unitymedia will become part of Vodafone, which is much larger (revenues of €46 billion) and has a higher rating. In addition, the combination of Unitymedia with Vodafone's assets in Germany will bring significant cost saving opportunities and improve Vodafone's geographical coverage in the country. While Moody's expects that Vodafone will not provide explicit credit support for the rated Unitymedia debt, the agency believes that Unitymedia will become an integral part of Vodafone's operations in Germany, one of Vodafone's key markets.

Vodafone will be acquiring Unitymedia inclusive of its debt. Upon closing, a change of control will be triggered with respect to Unitymedia's debt, and lenders and bond holders will have an option to put their debt to Vodafone. However, Vodafone currently expects to retain Unitymedia's existing bond structure (€4.5 billion outstanding) and re-finance it only over time. Nevertheless, it plans to repay €2.2 billion of Unitymedia's term loans shortly after completion of the transaction. Thus upon transaction closing, Unitymedia's Moody's adjusted gross leverage could potentially reduce to around 4.2x (compared to 5.6x as of 31 March 2018), provided the repayment of the bank debt at Unitymedia is executed via an equity injection from Vodafone.

The ratings review will assess the degree of improvement in UM's business profile, its credit metrics, final capital structure and future financial policies, as well as any implicit support from Vodafone. Its resolution could result in a multi-notch upgrade of Unitymedia's secured and unsecured debt ratings.

UM's B1 CFR takes into account (1) its solid operating performance, evidenced by strong revenue and EBITDA growth; (2) Moody's expectation that the company's strategic focus on integrated offerings, transitioning of customers from analogue to digital TV, network expansion and regular price increases should yield continued growth in revenue generating units ("RGU") and Average Revenue Per User ("ARPU"); (3) the competitive advantages from the company's high capacity network; and (4) the benefits for UM of operating in some of the more affluent areas of Germany Europe's largest cable market.

The rating also factors in (1) the company's significant leverage (UM's Debt/EBITDA ratio - as calculated by Moody's stands at around 5.6x for the last twelve months ("LTM") ending 30 March 2018); (2) its high capex requirements (PPE additions of 29.5% of revenues for the first three months to 31st March 2018); (3) the strong competition in the multi-dwelling units ("MDU") business, in particular for larger housing association contracts; (4) the absorption of the company's free cash flow ("FCF") via distributions to Liberty; and (5) continued net video subscriber losses, albeit at a moderate rate.

WHAT COULD CHANGE THE RATING UP/DOWN

A near-term upgrade of UM's ratings is dependent on the successful conclusion of its disposal to Vodafone, which is subject to regulatory approval and is expected to complete in the middle of calendar 2019. The ratings could be confirmed at the existing level should the deal fail to conclude at the agreed terms.

As Moody's had noted prior to the review process, upward ratings pressure could develop if (1) the company's operating performance remains solid; (2) Moody's adjusted Gross Debt/ EBITDA ratio improves towards 5.25x (as calculated by Moody's); and (3) Moody's adjusted cash flow from operations ("CFO")/ Debt ratio is sustained above 14%.

Downward ratings pressure could ensue if: (1) the company experiences a marked deterioration in operating performance; (2) leverage rises above 6.0x Gross Debt/ EBITDA (as adjusted by Moody's); and (3) Moody's adjusted CFO/ Debt falls below 8% for a sustained period of time.

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.

COMPANY PROFILE

UM, an indirectly wholly-owned subsidiary of Liberty Global plc ("Liberty Global", rated Ba3/Stable), is the second largest cable operator (provider of basic and enhanced video, Internet and telephony services) in Germany by number of customers. For the year ended 31 December 2017, the company generated €2.4 billion in revenues and €1.5 billion in EBITDA as adjusted by the company.

LIST OF AFFECTED RATINGS

Placed On Review For Upgrade:

..Issuer: Unitymedia GmbH

....Corporate Family Rating, Currently B1

....Probability Of Default, Currently B1-PD

....Senior Unsecured Regular Bond/Debenture, Currently B3

..Issuer: Unitymedia Hessen GmbH & Co. KG

....Backed Senior Secured Regular Bond/Debenture, Currently Ba3

....Backed Senior Secured Bank Credit Facility, Currently Ba3

..Issuer: Unitymedia Finance LLC

....Backed Senior Secured Bank Credit Facility, Currently Ba3

Outlook Actions:

..Issuer: Unitymedia GmbH

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

..Issuer: Unitymedia Hessen GmbH & Co. KG

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

..Issuer: Unitymedia Finance LLC

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

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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