PRESS RELEASE: S&P Affirms U.K.-Based Vodafone 'A-/A-2' Ratings; Otlk Neg

11th Jun 2010 18:30

The following is a press release from Standard & Poor's: -- U.K.-headquartered telecommunications company Vodafone Group PLC posted higher free cash flow (before spectrum payments) than we anticipated in financial 2010. -- We are affirming Vodafone's 'A-' long-term and 'A-2' short-term corporate credit ratings. -- The negative outlook reflects our view that Vodafone's leverage remains high for the rating, leaving limited leeway for underperformance and/or acquisition. LONDON (Standard & Poor's) June 11, 2010--Standard & Poor's Ratings Services said today that it affirmed its 'A-' long-term and 'A-2' short-term corporate credit ratings on U.K.-headquartered telecommunications company Vodafone Group PLC. The outlook is negative. The ratings affirmation reflects our view that Vodafone's free cash flow before spectrum payments was better than we anticipated in financial year ended March 31, 2010, at GBP7.2 billion instead of the originally announced guidance of GBP6.0 billion-GBP6.5 billion at the beginning of financial 2010. This result was despite considerable macroeconomic uncertainties in the fourth quarter of financial 2009, and was complemented by working capital efficiencies. However, the negative outlook remains in place due to our view that despite the recent improvement in free cash flow before spectrum payments, Vodafone's leverage remains high for the ratings, leaving limited leeway for underperformance and/or acquisition. We anticipate that the group will reduce leverage to a level of 2.5x adjusted debt to EBITDA or less, and maintain sufficient financial flexibility in the form of discretionary cash flow over the next 12 to 18 months. "We think that deleveraging potential may be threatened, notably if macroeconomic conditions or currencies weaken in the countries where Vodafone operates, thereby putting the ratings under pressure," said Standard & Poor's credit analyst Michael O'Brien. Vodafone's credit metrics have improved modestly in financial 2010 thanks to better working capital management and the full consolidation of Vodacom. However, Vodafone is not in an official deleveraging mode from a financial policy perspective. This is highlighted, among other events, by the company's plan to increase dividends by 7% a year for the next three years; we think that this could result in modest negative discretionary cash flow in financial 2011, depending on the level of free operating cash flow. Adjusted debt to EBITDA for the financial year ended March 31, 2010, was 2.6x, compared with 2.8x a year earlier, while adjusted funds from operations (FFO) to debt rebounded to 34.2% from 30.7% a year ago. In our view, Vodafone's ratings have little headroom and could be lowered if the outlook for deleveraging on an organic basis over the next 12 months were not good, or if credit metrics were to weaken substantially by the half-year of financial 2011 (which is not our base case) due to operating underperformance based on competition or the effects of macroeconomic weakness. We could also lower the ratings in the event of acquisition activity not offset by other disposals, adverse foreign exchange volatility, or shareholder returns over and above the proposed dividend increase over the next three years without earlier substantial deleveraging. Rating downside could also be precipitated by cash outflows from potential tax-related contingent liabilities, particularly if such outflows were not simultaneously offset by other inflows such as disposals or the receipt of future dividends from Verizon Wireless. We could revise the outlook to stable if Vodafone were to make substantial use of any dividends from Verizon Wireless to deleverage the balance sheet, if plans for organic deleveraging were successful and based on execution of the business plan, or if the company were to use proceeds from the sale of assets to deleverage to a more comfortable level for the rating. We consider that Vodafone's adjusted debt to EBITDA may fall to less than 2.5x to maintain the rating over the next 12 to 18 months. We will monitor Vodafone's operating performance closely to ascertain its progress. RELATED CRITERIA AND RESEARCH -- "Use Of CreditWatch And Outlooks," Sept. 14, 2009 -- "Key Credit Factors: Business And Financial Risks In The Global Telecommunication, Cable, And Satellite Broadcast Industry," Jan. 27, 2009 Complete ratings information is available to RatingsDirect on the Global Credit Portal subscribers at www.globalcreditportal.com and RatingsDirect subscribers at www.ratingsdirect.com. 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(END) Dow Jones Newswires June 11, 2010 13:30 ET (17:30 GMT)