Fitch Affirms Vodafone's Debt Ratings at 'A-'; Outlook Stable

Published on: 27th May 2012

Fitch Ratings has affirmed Vodafone Group's Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'A-', and its Short-term IDR at 'F2'. The Outlook on the Long-term IDR is Stable.

?Fitch said that Vodafone's strengths include its global scale, diverse operations, sound liquidity, and good cash flow generation. The trend in underlying European revenue remains challenging, with emerging markets (27% of consolidated FY12 operating free cash flow) continuing to drive growth. Vodafone expects EBITDA margin erosion to slow as management maintains its focus on cost controls, especially in Europe. Continued network and spectrum investments should enable the company to benefit from increased demand for higher-quality mobile data services.

The Stable Outlook reflects a credit profile that has the flexibility of absorbing a sluggish macroeconomic environment and continued competitive pressure. The expectation of continued substantial dividend payments by Verizon Wireless should help Vodafone absorb potential risks from the eurozone periphery (which accounts for around 35% of consolidated FY12 operating free cash flow) and an uncertain regulatory and legal framework in India.

"The start of significant and ongoing dividend receipts from Verizon Wireless considerably improves Vodafone's credit profile," says Damien Chew, Senior Director in Fitch's European Telecoms, Media and Technology team. "It should give Vodafone the headroom to continue investing in spectrum and network quality, and the flexibility to navigate an uncertain operating environment."

With the increasing relevance of dividends from Verizon Wireless, Fitch believes using funds from operations (FFO) adjusted net leverage is a more appropriate measure to judge leverage, which at end-March 2012 was around 2.1x. Expectation of FFO adjusted net leverage being sustained above 2.5x would put pressure downward pressure on Vodafone's rating. A deterioration in the company's operating environment, such as a worsening of the eurozone crisis or a significant increase in regulatory or competitive pressure, could also lead to negative rating action.

Fitch believes there is still some level of acquisition risk, given that in-country consolidation opportunities may arise in Vodafone's countries of operations, but this is more muted due to management's demonstrated financial discipline and commitment to maintaining its 'A-' rating.

Liquidity remains strong. Vodafone had GBP7.1bn of cash and cash equivalents on its balance sheet at the end-March 2012, as well as GBP987m of liquid index-linked UK government bonds and almost GBP8bn equivalent of undrawn committed facilities. This compares with GBP2.2bn in outstanding commercial paper and around GBP4bn of short-term debt at the end of March 2012.

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