Rating agency Moody’s (MCO) asserted a stable outlook for Vodafone Group Plc.’s (VOD) debt position and also maintained A3 ratings for its long-term debt and P-2 for its short-term debt.
Despite facing strong macroeconomic pressures, regulatory issues and intense competition from other carriers like Telef (TEF) and France T (T) across the European region, Vodafone remains successful in maintaining such an outlook. This can be mainly attributed to huge dividend payments of nearly $3.2 billion to be received from Verizon Wireless by June end.
Moreover, Vodafone has a strong presence across the most emerging and developed parts of the world. This has further helped Moody’s rating agency to retain faith over the company’s growth prospect.
Verizon Wireless is a joint venture between Verizon Communications Inc. (VZ) and Vodafone, both holding a 55% and a 45% stake, respectively. Verizon Wireless paid dividend of nearly $8 billion last year to Vodafone in two tranches after it resumed its investor returns in 2011. Prior to this, Verizon had ceased paying dividends since 2005 as it utilized the surplus for lowering debt levels.
The dividend received from Verizon Wireless will not only boost Vodafone’s free cash flow and shareholders’ returns but will also help the company utilize the fund to deploy 4GLTE services across its footprints.
According to Moody’s rating agency, Vodafone’s financial leverage (gross debt/EBITDA) was 3.2x at the end of Mar 2013, with adjusted retained cash flow (RCF)/net debt of 28%, which as per the rating firm is quite fragile.
However, Vodafone’s credit ratings can improve if the financial leverage position falls below 2.0X and the RCF/net adjusted debt ratio leaps above 35%. None of this is possible as the company continues to get affected by the consistent fall in MTR rates across the European region coupled with huge charges incurred by the company in the Italian and Spanish operations.
Currently, Vodafone carries a Zacks Rank #3 (Hold).
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