Fitch puts Vodafone bonds on ratings watch negative

Rating agency Fitch has warned that Vodafone's agreed purchase of Spanish cable operator Ono could push its leverage to the upper end of what is acceptable for its current 'A-' rating. Fitch placed Vodafone's 'A-' long-term issuer default rating and senior unsecured debt on 'rating watch negative', and said: "We will likely downgrade Vodafone's rating by one notch if it acquires Ono without taking other measures to reduce debt." The agency noted that Vodafone's leverage was currently low for a 'A-' rating as its funds from operations adjusted net leverage was expected to be 1.2 times assets at the end of March 2014. However, the planned acquisition of Ono, together with the £7bn expenditure on Project Spring improvement programme over the next few years, "could push this metric to above 2.5x within 18 months, which is the upper end of the leverage range for a 'A-' rating". Fitch agreed the acquisition should significantly improve Vodafone's competitive position in Spain, which accounted for 6% of Vodafone's consolidated EBITDA in the first half of the year.The Project Spring spending could increase market share and over time, improve cash flow generation, it said, but Vodafone will need to be able to demonstrate to subscribers that a quality differential exists and the subscriber might have to be willing to pay a price premium.On the negative side, Fitch observed that Vodafone has experienced a deterioration in organic service revenue growth in almost all of its main markets and was, post Verizon, exposed to higher degrees of emerging market risk compared with historical levels."While macro conditions and regulatory headwinds should begin to improve, there is still likely to be a continued drag on EBITDA over the coming few years and there is limited visibility over an inflection point in this trend."OH