Moody’s downgrades Virgin Media

Moody’s Investors Service has downgraded Virgin Media to Ba3 from Ba1 reflecting the company’s weakened credit profile following the completion of its acquisition by Liberty Global.

Moody’s has also taken a number of rating actions affecting Liberty Global plc and its wholly-owned subsidiaries and certain special purpose vehicles.

In a press tatement, Moody’s said that the agency has:
(i) moved the Ba3/Ba3-PD Corporate Family Rating (CFR) and Probability of Default Rating (PDR) for the Liberty Global group of companies to Liberty Global plc the group’s new ultimate holding company
(ii) withdrawn the (P) Ba3 CFR of Lynx I Corp.
(iii) replaced the provisional instrument ratings at Lynx I Corp. and Lynx II Corp.
(iv) downgraded the CFR and PDR of Virgin Media Inc. to Ba3 (from Ba1) and Ba3-PD (from Ba1-PD)
(v) downgraded the Baa3-rated senior secured notes at Virgin Media Secured Finance plc (VMSF) to Ba3
(vi) downgraded the Ba2-rated senior unsecured notes of Virgin Media Finance (VMF) plc to B2

All ratings for Liberty Global, including those of its wholly-owned subsidiaries Virgin Media, UPC and Unitymedia KableBW remain under review for possible downgrade. The review was first initiated in February 2013.

The rating actions follow the completion of Liberty Global’s acquisition of Virgin Media in early June 2013. The terms of the acquisition were broadly unchanged from those announced in February this year and the downgrades for Virgin Media are in line with those indicated in Moody’s press release of February 6 2013. The downgrades reflect Virgin Media’s weakened credit profile following the acquisition by Liberty Global (leverage increased to around 5.3x Debt/EBITDA as calculated by Moody’s on a first-quarter 2013 annualized basis) as well as the alignment of Virgin Media’s financial policy with the more debt-tolerant stance of Liberty Global. Liberty Global aims to maintain reported gross leverage (total debt to annualized OCF of the latest quarter) in the range of 4.0x-5.0x for the group.

Acquisition debt originally raised at special purpose vehicles Lynx I Ltd. and Lynx II Ltd. has been pushed down to VMSF and VMF as planned and consequently the CFR for this debt anchored at Lynx I has been withdrawn. As part of the reorganization of the Liberty Global group in connection with the acquisition of Virgin Media, Liberty Global plc became the publicly quoted ultimate holding company for the Liberty Global group of companies and consequently Moody’s CFR and PDR for Liberty Global, Inc. were moved to Liberty Global plc.

All ratings of Liberty Global and its wholly-owned subsidiaries (including Virgin) remain under review for downgrade and statements made in Moody’s February 6 2013 press release regarding likely rating outcomes no longer apply. The continued review reflects primarily the uncertainty regarding the impact on the debt protection measurements and group structure of the Liberty Global group from a potential acquisition of German cable operator Kabel Deutschland Holding AG (KDH). KDH had informed the market on June 17 2013 that it had received a preliminary proposal from Liberty Global plc. This followed an earlier similar announcement by KDH regarding a proposal from Vodafone Group plc (rated A3 by Moody’s).

Liberty Global has not publicly elaborated on its intentions. However, given the company’s longstanding strategic objective of consolidating the German cable market, Moody’s believes that the company will vigorously explore a potential acquisition, in particular given the interest in the asset from Vodafone. This is despite a regulatory environment that in Moody’s opinion will make a combination of Liberty Global’s German assets with KDH more challenging. Moody’s estimates that based on KDH’s current share price (~Euro 85) its enterprise value would be around Euro 10 billion and notes that on a first-quarter 2013 basis (pro forma for the Virgin acquisition) Liberty Global leverage is at around the lower boundary of 5.5 Debt/EBITDA that Moody’s has set for Liberty Global’s Ba3 CFR.