Vodafone Debt Ratings Downgraded Following Acquisitions
Published on: 6th Aug 2014
Fitch Ratings has downgraded Vodafone Group's Long term debt ratings to 'BBB ' from 'A '. Fitch said that the downgrade is driven by an increase in leverage resulting from the acquisition of Spanish telco, Ono.
Fitch also expects that over the next couple of years, free cash flow generation is likely to be hampered by competitive pressures in Europe and by investment needs stemming from network upgrades and spectrum acquisition. Vodafone is likely to end the financial year to March 2015 with a funds from operations (FFO)-adjusted net leverage of around 3.0x, adjusted for ONO, up from 2.1x in FY14 (excluding income dividend from Verizon Wireless).
Acquisition Risk Less Significant
Following the Ono and Kabel Deutschland acquisitions, Fitch believes that Vodafone's acquisition risk profile is now less significant. Future European investment is more likely to be organic. M&A activity is more likely in emerging markets, with possible consolidation in the Indian market the most relevant for Vodafone.
Project Spring Payoff
Vodafone's plan to spend around GBP19bn in organic investment over the next two financial years, including Project Spring to build a network quality advantage over its competitors, could increase market share and over time, improve cash flow generation. Visibility of a return on this investment remains limited. Demonstrating to subscribers that a quality differential exists will be key, with either the subscriber willing to pay a price premium for better service quality, or Vodafone maintaining a sustainable competitive advantage.
Increasing Emerging Market Exposure
Europe's contribution to overall group cash flow is continuing to decline, while the importance of Vodafone's emerging market business continues to grow. This exposes the group to higher degrees of emerging market risk compared with historical levels. The Indian tax case and the previous uncertainty surrounding the 2013 Indian spectrum auctions highlight the unpredictability of these markets. The increasing exposure also exposes Vodafone to the threat of increased FX variability, although local currency debt helps mitigate this risk.
Vodafone continues to experience weak organic service revenue growth trends in almost all of its main markets. While macro-economic conditions and regulatory headwinds should begin to improve, there is still likely to be a continued drag on EBITDA over the coming two years from competitive pressures and further investment.
Liquidity not a Risk
Vodafone ended FY14 with GBP10.1bn in cash and cash equivalents, GBP3.8bn in liquid investments as well as GBP6.5bn of undrawn committed credit facilities. Fitch believes that Vodafone continues to have strong access to the capital markets to refinance upcoming bond maturities, if required.