Fitch Ratings affirmed Vodafone Group's Long-term Issuer Default (IDR) and senior unsecured ratings at 'A-' (A minus) and Short-term IDR at 'F2'. The Outlook remains Stable. Fitch says that the ratings reflect Vodafone's unrivalled scale as one of the world's largest mobile operators (by revenue), with a solid market position across Europe and a diversified portfolio of non-European assets.
The ratings also reflect the strong cash flow generation, with cash flow from operations of GBP10.3bn for the year ended March 2008. Although Fitch-adjusted net leverage rose to 2.5x (2.2x in FY07), the agency expects Vodafone's credit metrics to remain consistent with the FY08 levels and in line with the group's low single 'A' target rating.
Although a modest acquisition-driven debt increase could be tolerated (assuming it is cash-flow-accretive), any significant increases in leverage would put downward pressure on the ratings.
"A key issue for Vodafone is the growth of mobile broadband in western Europe over the next three years," says Michael Dunning, Head of Fitch's TMT group in London. "Only 21% of Vodafone's European customers hold a 3G device, and this needs to continue to grow so that mobile average revenue per user can benefit from additional revenue streams."
Despite intense competition and regulatory pressure, Vodafone's European service revenues increased 6.3% yoy during FY08. This comprised a 2.1% organic growth, as strong growth in data revenues and an increase in registered mobile customers offset the impact of declining voice pricing. Management's cost-cutting initiatives resulted in flat operating costs during FY08; however, increasing retention and acquisition costs continued to pressure margins. The evolution of mobile data should result in rising average revenue per user, although the positive impact of these developments will take time to emerge.
Technological advances in network infrastructure have catalysed the convergence of fixed and mobile services. Vodafone is slowly rolling out fixed-line broadband services across Europe, deploying its fixed and mobile convergence strategy, in an attempt to enhance its competitive position and technological capability and to eliminate customer churn.
During FY08, unadjusted debt net of cash increased GBP4.4bn to GBP26.2bn, reflecting the additional debt and put option liability linked to the acquisition of the Indian business. The bulk of Vodafone funding is made up of bonds that are backed up by bank lines totalling USD11.3bn. CFO generation of GBP10.3bn in FY08 covers debt maturities of around GBP4.5bn over the next year.
Posted to the site on 14th July 2008
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