Vodafone purchases spark S&P downgrade

By Edward Clark

LONDON, Aug 1 (IFR) - Vodafone's bonds widened on Thursday, after the company's debt-funded purchase of assets owned by Liberty Global caused S&P to cut its rating.

Vodafone, which last appeared in the euro benchmark market in May with a €2.5bn triple-trancher, was downgraded one notch by the ratings agency to BBB. Spreads on all three bonds have widened since Thursday's open.

The €750m 0.90% Nov 2026s and €750m 2.50% May 2039s moved out by 2bp to be bid at mid-swaps plus 48bp and 129bp, respectively. The €1bn 1.625% Nov 2030s widened by 3bp to 86bp.

S&P said the downgrade from BBB+ was driven by the largely debt-financed purchase of Liberty Global's operations in Germany, the Czech Republic, Hungary and Romania for €18.4bn.

The agency expects Vodafone's S&P-adjusted leverage to remain in a range of 3.0x-3.5x over the medium term, which caused it to reassess the company's risk profile.

S&P forecasts that Vodafone's adjusted debt to Ebitda will peak at about 3.4x at the end of the 2020 financial year.

The ratings agency has a stable outlook for the credit, reflecting its anticipation that positive Ebitda growth, as well as positive discretionary cashflow generation from fiscal year 2021, will enable Vodafone to reduce adjusted leverage from that peak.

S&P views the new acquisition as positive for the company's position in the German market, making it substantially less dependent on Deutsche Telekom and enhancing its operating margins. But the agency said the transaction does not sufficiently change its view of the company's business risk.

S&P also notes an expectation of increased headroom within the issuer's financial risk profile due to "cost reduction as Vodafone continues to execute its cost efficiencies plan" and "positive discretionary cashflows of about €1bn in the fiscal year 2021".

Vodafone is currently rated Baa2 and BBB+ by Moody's and Fitch. (Reporting by Edward Clark; Editing by Robert Hogg, Philip Wright)