Fitch Revises Vodafone's Outlook to Negative

Fitch Ratings has changed Vodafone's Issuer Default Ratings outlook to negative, although it affirmed the company's current ratings for long-term Issuer Default (IDR) and senior unsecured ratings at 'A-' (A minus) and Short-term IDR at 'F2'.

Fitch says that the Outlook change reflects concerns that Vodafone's operational performance and cash flow generation will be negatively impacted by continuing recessionary conditions and rising competition in its major markets, as well as at its growing Indian operation. In addition, Fitch notes that Vodafone's Turkish business may take longer than initially expected to turn around.

These trends suggest that over the next three years free cash flow generation is likely to be less than has been achieved in recent years, assuming a broadly unchanged dividend payout. Furthermore, these factors are expected to keep Vodafone's leverage (measured as adjusted net debt/EBITDAR) above 2.5x for the next 2-3 years. Whilst the company's rating is able to tolerate a short term spike in leverage at the current rating level, the Outlook change also reflects the reduced headroom the group has at the 'A-' level.

Since Verizon Wireless is accounted for by Vodafone as an associate, and at present pays only limited dividends, Vodafone's credit metrics (based on either EBITDA and/or FFO) do not benefit from the appreciating value of the potential earnings stream from Verizon Wireless. Fitch acknowledges the value in the Verizon Wireless asset both as a potential source of significant dividends, and that the stake is potentially a monetisable asset. However, the requirement to pay down debt relating to the Alltel acquisition means that the dividend from Verizon Wireless is unlikely to realise its full potential until 2011 at the earliest.

The increased leverage comes at a time when most European mobile operators are revising down their growth estimates. Fitch expects that negative economic pressures in all markets will reduce Vodafone's scope to deleverage organically to below 2.5x until economic recovery ensues. Fitch's current 2.8x leverage metric for Vodafone (based on preliminary figures) is relatively conservative - including the fair value of the Vodafone Essar put option, which increases leverage by approximately 0.2x. Vodafone is prevented from owning the whole of this stake by current foreign ownership requirements - however, were the option exercised it is clear that part of this stake would need to be resold with the proceeds being used to repay debt in 2011.

In the short term, a downgrade could be triggered by a spike in leverage above 3.0x, or evidence that the group will not meet Fitch's rating case forecast, which sees leverage materially return to a 2.5x metric by March 2012. Conversely, faster than expected deleveraging, with expectations that the group will continue to delever to below the 2.5x level, is likely to result in a revision of the rating outlook from negative to stable at the current level.

Fitch concluded that Vodafone's liquidity remains very solid with cash and committed borrowing facilities sufficient to cover maturities (including commercial paper) until mid calendar-year 2010.

Posted to the site on 20th May 2009