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Vodafone hammered by Moody’s downgrade on Unitymedia acquisition

Publication Date: 26 Feb 2019 - By ReachX Team By ReachX Team
Actionable
Differentiated

Equity Fundamental Equity EU ex-UK UK Telecom & Media

Telecoms giant Vodafone (LON:VOD) has been downgraded by Moody’s, following a review the rating agency initiated on 11 May 2018. 

In a note to clients, Moody’s said the downgrade follows the company's announcement of the proposed acquisition of German cable operator Unitymedia owned by Liberty Global (NASDAQ:LBTYA), and the Central and Eastern European assets of Liberty's subsidiary, UPC Holding, for an enterprise value (EV) of €18.4bn.

The agency has downgraded Vodafone Group's 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. 

Moody’s said it overall outlook for the telecoms giant is ‘negative’ as 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.”

Moody’s sees 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. 

Laura Perez, Senior Credit Officer and lead analyst for Vodafone at Moody’s, said: “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.”

However, Perez added that Moody’s believes 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.

 

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