Fitch Downgrades Vodafone to 'BBB'; Outlook Stable
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2019/8/14 Press Release Fitch Downgrades Vodafone to 'BBB'; Outlook Stable Fitch Ratings - London - 13 August 2019: Fitch Ratings has downgraded Vodafone Group Plc's Long-Term Issuer Default Rating (IDR) and senior unsecured ratings to 'BBB' and Short Term IDR to 'F3'. All ratings have been removed from Rating Watch Negative (RWN). The Outlook on the Long-Term IDR is Stable. A full list of rating actions is at the end of this commentary. The downgrade reflects our expectation of elevated leverage following the completed acquisition by Vodafone of Liberty Global's (LG) assets in Germany, Czech Republic, Hungry and Romania. Fitch expects Vodafone's pro-forma funds from operations (FFO) adjusted net leverage to reach 4.1x in financial year to March 2020 and to subsequently remain above our downgrade threshold for a 'BBB+' rating of 3.5x. The Stable Outlook reflects our expectations that leverage will fall below our new downgrade trigger of 4.0x by March 2022. Vodafone's announced reduction in dividend payments and the disposal of Vodafone New Zealand this year have both improved deleveraging capacity in 2020. Our rating assumptions include cash proceeds from completed disposals. This means the stake sale of towers in Italy and the announced plans to form a European tower company have not been included in our projections. Key Rating Drivers Competitive Pressure: EBITDA declined 4% yoy in FY19 following adverse foreign exchange effects, the sale of Vodafone Qatar and competitive pressure in Italy and Spain as new entrant Iliad in Italy and MasMovil in Spain build scale. We expect the pace of decline on an organic basis to improve for FY20 before reversing to mild growth in FY21. Vodafone aims to make at least EUR400 million in cost savings across the company per year, the benefits of which will help Vodafone to stabilise its financial performance. Spectrum Payments Restrain Deleveraging: Many of Vodafone's European markets have either auctioned 5G spectrum or are in the process of doing so. In some core markets such as Italy the spectrum costs have been higher than our original estimates. Fitch's base case forecasts envisage spectrum payments of EUR7.5 billion between FY20 and FY23. The spectrum costs are likely to restrain the company's organic deleveraging capacity. LG Deal Strong Rationale but Debt-Funded: Vodafone's EUR18.4 billion (enterprise value) acquisition of LG's cable assets in Germany, Czech Republic, Hungry and Romania has a strong rationale. It will give Vodafone cable coverage in all regions of Germany, the ability to extract synergies with existing operations and provide convergent network capability in three other markets. The cost of the transaction has been pre- funded through a combination of EUR10 billion bonds, EUR6 billion hybrids and EUR4 billion mandatory convertible bonds. We expect the transaction to increase pro-forma FFO adjusted net leverage by about 0.7x in FY20. Limited Leverage Headroom: On a pro-forma basis FFO adjusted net leverage will increase to 4.1x in FY20, before easing to 4.0x in FY21. Taking into account both the scale of the LG deal and Vodafone's expected organic deleveraging capacity we expect the company to return to or below the downgrade threshold of 4.0x in 18 months. This limits the company's leverage headroom in the event of any unexpected competitive pressures or operational difficulties. https://www.fitchratings.com/site/pr/10085828 1/6
2019/8/14 Press Release Network-Sharing Supportive of 5G: Vodafone has recently signed mobile network-sharing agreements in three of its core European markets namely the UK, Italy and Spain. While network-sharing is not new in the sector, the breadth and depth of agreements and their timing are significant in the run-up to 5G and supportive of Vodafone's credit profile in the medium-term, in our opinion. The move is likely to have multiple benefits in terms of reducing the cost of network deployment, optimising the value of passive infrastructure assets and broadening Vodafone's range of options given the lack of current visibility of 5G capacity demand and evolution. European Tower Assets: Vodafone plans to merge their tower assets in Europe into a newly created European tower company by May 2020. The company has committed to using the proceeds of any monetisation options to reduce debt. Our projections assume no proceeds from European tower sales but any such disposals could reduce Fitch-calculated leverage metrics taking into account our operating lease criteria. Strong Portfolio of Assets: Vodafone's European operating subsidiaries typically hold a first or second position within each of their geographies and operate in an oligopolistic market structure. The company has gradually increased its convergent network ownership across most of its core markets. This provides Vodafone with sufficient scale to compete with incumbent operators and some structural support to cash flow generation. Derivation Summary Vodafone's natural peer group includes the large diversified European incumbent telecom operators, Deutsche Telekom AG (DT), Orange S.A. (both BBB+/Stable) and Telefonica SA (BBB/Stable), extending to incumbents with more limited scale, such as BT Group plc (BBB/Stable), Royal KPN N.V. (BBB/Stable) and Telecom Italia S.p.a (BB+/Stable). Compared with the large incumbent 'BBB+' rated peers, Vodafone has a well -diversified portfolio of international businesses, with strong geographic scope, and similar or better growth potential than DT and Orange. Following the LG purchase Vodafone's leverage is stretched relative to that of the peer group. The scale and diversification of this peer cohort nonetheless provides deleveraging methods (cash-flow scale, potential for asset sales or minority listings) not enjoyed by smaller operators, providing more latitude in this group's downgrade threshold. No country ceiling, parent/subsidiary operating environment aspects impact the rating. Key Assumptions Fitch's Key Assumptions within our Rating Case for the Issuer -Reported revenue to increase by around 3% in FY20 on a pro-forma basis to just over EUR45 billion, and thereafter in the low single digits. -EBITDA margin to increase to 34% in FY20 on a pro-forma basis, reflecting higher EBITDA margin at the assets acquired. Thereafter we expect modest improvement to 35% by FY23. -Capex/sales (excluding spectrum) remaining at around 16%-17%% per annum. -Spectrum payments of EUR 7.5 billion over the next four financial years to FY23. -Operating cost and capex synergies rising from EUR65 million in the first year of the LG deal to EUR405 million by year four. LG integration costs of EUR1 billion to be spread over four years, with 87% of https://www.fitchratings.com/site/pr/10085828 2/6
2019/8/14 Press Release
the costs being incurred in year one to three.
-Operating lease rentals used for calculating the lease-adjusted debt (excluding local loop unbundling costs)
in line with the previous financial year at around 5% of revenues.
- FY19 net derivative position, excluding interest rate swaps, in line with FY18's.
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Positive Rating Action
- FFO adjusted net leverage falling below 3.5x on a sustained basis
- Sustained improvements in free cash flow (FCF) generation
- Continued stability and improving trends across Vodafone's main operating subsidiaries
Developments that May, Individually or Collectively, Lead to Negative Rating Action
- FFO adjusted net leverage above 4.0x on a sustained basis, which would lead to a downgrade
- Pressure on FCF driven by EBITDA margin erosion, higher capex and shareholder distributions, or
significant underperformance in the main operating subsidiaries
Liquidity and Debt Structure
Strong Liquidity: Vodafone exhibits sound liquidity, including good access to debt markets, strong banking
relationships and solid pre-distribution FCF. The company reported cash and cash equivalents of EUR13.6
billion at FYE19, in addition to a further EUR7.9 billion of undrawn bank lines.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3. ESG
issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to
the way in which they are being managed by the entity. For more information on our ESG Relevance
Scores, visit www.fitchratings.com/esg.
RATING ACTIONS
ENTITY/DEBT RATING PRIOR
LT IDR
Vodafone Group Plc BBB BBB+
Downgrade
ST IDR
F3 F2
Downgrade
LT
senior
BBB BBB+
unsecured
Downgrade
subordinated LT BBB-
BB+
https://www.fitchratings.com/site/pr/10085828 3/62019/8/14 Press Release
Downgrade
ST
senior
F3 F2
unsecured
Downgrade
Additional information is available on www.fitchratings.com
FITCH RATINGS ANALYSTS
Primary Rating Analyst
Tajesh Tailor
Senior Director
+44 20 3530 1726
Fitch Ratings Ltd
30 North Colonnade, Canary Wharf
London E14 5GN
Secondary Rating Analyst
Tom Steabler, ACA
Associate Director
+44 20 3530 1661
Committee Chairperson
Damien Chew, CFA
Senior Director
+44 20 3530 1424
MEDIA CONTACTS
Adrian Simpson
London
+44 20 3530 1010
adrian.simpson@thefitchgroup.com
Applicable Criteria
Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018)
Corporate Hybrids Treatment and Notching Criteria (pub. 09 Nov 2018)
Corporate Rating Criteria (pub. 19 Feb 2019)
Short-Term Ratings Criteria (pub. 02 May 2019)
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy
DISCLAIMER
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