OREANDA-NEWS. Fitch Ratings has assigned Virgin Media Receivables Financing I DAC's proposed receivables financing notes (RFNs) expected ratings of 'B+(EXP)'/'RR5(EXP)'.

The expected ratings are one notch lower than Virgin Media Inc.'s (VMED) Long-Term Issuer Default Rating (IDR) of 'BB-' and a notch higher than the group's senior unsecured debt. The ratings reflect Fitch's assessment of the security and transaction structure, which places the RFNs structurally senior to VMED group's senior unsecured debt. The rating of the RFNs, and the potential recoveries in a distressed scenario, is highly dependent on the amount of prior ranking senior secured debt. An increase in VMED's senior secured leverage would be negative for the RFN's ratings.

Final ratings will be assigned to the RFNs subject to receipt of final documentation in line with the draft documents reviewed.

Virgin Media Receivables Financing Notes I DAC is a Republic of Ireland-domiciled special purpose vehicle.



The RFNs represent the joint and several obligations of Virgin Media Investment Holdings Limited (VMIH), the borrower of the group's credit facility and one of the guarantors of the group's secured debt; Virgin Media Senior Investments Limited (VMSI), a newly created holding company; along with the initial operating company (opco) obligors, Virgin Media Limited and Virgin Mobile Telecoms Limited. Security will be approved receivables drawn on the initial obligors and the structure creates joint and several liabilities of the obligor group.

At June 2016 VMSI and its subsidiaries represented in excess of 70% of VMED group's assets and in excess of 95% of six-month revenues. The RFNs and VM Facilities benefit from guarantees from VMSI and the opco obligors, creating structural seniority relative to the group's senior unsecured debt given that the latter is not guaranteed by VMSI. From an organisational perspective, VMSI sits closer to the operating assets of the group. Nor does the unsecured debt benefit from guarantees from any of the operating companies. While the unsecured debt has a subordinated guarantee from VMIH, the borrower/guarantor of the group's secured debt, Fitch believes this subordinated guarantee would not rank ahead of claims against VMIH under the RFNs.

Structural Parity with Existing Vendor Finance

Security for the RFNs in the form of eligible receivables will take the same form as those currently being funded through VMED's existing reverse factoring/vendor finance platform, referred to in the transaction documents, as the SCF platform. Existing vendor financing activities via the SCF platform will continue to take place alongside the RFNs. These liabilities are assumed by Fitch to achieve parity status in terms of where they sit in the capital structure, albeit they are not rated by the agency.

VMED's Capital Structure

As of end-June 2016, VMED's capital structure consisted broadly of GBP8.3bn of senior secured debt (secured bank debt and secured bonds), around GBP600m of existing vendor financing, finance leases and other debt, and GBP2.2bn of senior unsecured bonds. Fitch rates the group's senior secured debt at 'BB+'/RR1, two notches above the IDR and the unsecured debt at 'B'/'RR6', two notches below the IDR.

Vendor financing represents a small but growing part of VMED's capital structure; with liabilities of GBP402m reported at end-June 2016. Fitch believes VMED is likely to increase the use of vendor financing, including the proposed RFN issuance, as it seeks to fund capex associated with its Project Lightning build programme. This envisages four million new cable premises being passed by 2019, including 500,000 premises in 2016.

RFN Instrument Rating Approach

The expected instrument rating of the RFNs of 'B+(EXP)'/'RR5(EXP)' is a notch higher than the senior unsecured debt rating, reflecting the structural seniority and other benefits envisaged by the transaction. This rating also takes into account the sizeable amount of prior ranking senior secured debt ahead of the RFNs and vendor financing in the capital structure.

Given the amount of senior secured debt in the capital structure, there is a limit to the quantum of RFN/vendor finance debt VMED can raise while maintaining the one notch differential between the RFNs and the senior unsecured debt. RFN and vendor finance liabilities above around GBP1.5bn on a sustainable basis (looking through seasonal peaks) given the current amount of senior secured debt would put pressure on the RFN rating. Ongoing financial performance and how this is reflected in our view of recoveries is also important for notching to remain.

At end-June 2016 senior secured leverage, including the company's undrawn RCF, capital leases and other debt, of GBP9.1Bn, is equivalent to roughly 4.3x Fitch's 2016 forecast EBITDA of GBP2.1bn while an RFN and vendor finance threshold of GBP1.5bn is equivalent to roughly 0.7x leverage. Fitch assumes RFN/vendor finance liabilities for FYE16 in the region of GBP700m - GBP1bn.

Impact of Potential VMED Downgrade

Recovery ratings for corporate issuers with IDRs in the 'BB' category, such as VMED, are analysed using Fitch's generic approach. If VMED's IDR were to be downgraded to 'B+' or lower, we would move to using bespoke approach for recoveries - see "Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers", published 7 April 2016 for more details. Under a bespoke approach, combined with the weaker financial performance which may be associated with a potential downgrade, there is a risk that the recovery rating of the RFNs could go from RR5 to RR6. This would mean that it would be possible for the RFN instrument rating to be downgraded by 2 notches to 'B-' if VMED's IDR were to downgraded by 1 notch from 'BB-' to 'B+'.


Fitch's key assumptions within the rating case for VMED include:-

-Mid-single revenue growth in 2016; rising to around 6% in 2017 and 8% in 2018 reflecting Project Lightning investment

-Slight EBITDA margin compression in 2016, reflecting programming inflation before expanding thereafter,

-Accrual capex/sales ratio in a range of 25% - 27% in 2016, including Project Lightning capex and in line with management guidance, and we expect this to rise to above 30% in the next two years

-Operating metrics associated with Project Lightning in line with the trajectory envisaged by management targets but at moderately more conservative levels

- Net debt/EBITDA (including finance leases and vendor finance) at 4.9x - 5.0x, with excess cash flows repatriated to Liberty Global through payments under the shareholder loan.


For Virgin Media's IDR:

Future developments that may, individually or collectively, lead to negative rating action include:

- Funds from operations (FFO) adjusted net leverage expected to remain above 5.2x on a sustained basis (FY15: 4.9x).

- FFO fixed charge cover expected to remain below 2.5x on a sustained basis (FY15: 4.1x)

- Material deterioration in underlying free cash flow (FCF) generation. Our rating case assumes a pre-distribution FCF margin excluding Project Lightning investment in the mid-teens.

- Material decline in operational metrics, as evidenced by declining key performance indicators, such as customer penetration, revenue generating units per subscriber and average revenue per user. Evidence that investment in Project Lightning is being scaled up to proven demand will be an important operating driver.

Future developments that may, individually or collectively, lead to positive rating action include:

- A firm commitment by VMED that it is adopting a more conservative financial policy (for example, FFO adjusted net leverage of 4.5x).

- Continued sound operational performance, as evidenced by key performance indicator trends and progress in both investment and consumer take-up with respect to Project Lightning.

For the RFN instrument rating:

Future developments that may, individually or collectively, lead to negative rating action include:

- An increase in senior secured leverage, or an increase in RFN and vendor finance liabilities to above GBP1.5bn on a sustainable basis, which would reduce the potential recovery estimates for the RFNs in a potential VMED default scenario

- A downgrade of VMED's IDR.

In the event of a VMED downgrade recovery ratings would move to a bespoke analysis. Depending on the prevailing capital structure and post-distress value assumptions, recoveries of 10% or below would result in an RR6 recovery rating and notching of the RFNs widen to two notches from the IDR, in line with senior unsecured debt.

Future developments that may, individually or collectively, lead to positive rating action include:

- A reduction in prior rating senior secured debt, which would significantly improve the potential recovery estimates for the RFNs in a potential VMED default scenario. Under VMED's current financial policy, we believe this is unlikely.

- An upgrade of VMED's IDR.


Fitch considers VMED's liquidity to be sound, mainly provided in the form of underlying cash flow generation, good access to debt markets and the company's undrawn GBP675m revolving credit facility.