Value in high coupon Vodafone Group debt
admin | August 7, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The high coupon VOD 7.875% 2/15/30 bonds (Baa2 (n)/BBB/BBB) look attractive relative to other telecom peers, in particular versus AT&T (T – Baa2/BBB/A-). In the run 10-year space, the VOD 7.875% 2/15/30 bonds trade at +166 bp g-spread, 32 bp behind T 4.3% 2/15/30 bonds. Accounting for the sizable dollar price differential between the two bonds (29 points), the VOD 7.875% 2/15/30 should only trade 29 bp behind T 4.3% 2/15/30 bonds, assuming a basis point per dollar. However, the lower coupon VOD 4.375% 5/30/28 bonds trade roughly 13 bp (g-spread) through T 4.1% 2/15/28 bonds at a tenor just 2 years shorter. When that is factored in, fair value for the higher coupon VOD 7.875% 2/15/30 bonds is 16 bp to 19 bp behind T 4.3% 2030, or in the 150 bp to 153 bp g-spread range.
Exhibit 1: BBB Telecom spread comparison (7- to 10-year sector)
Source: Bloomberg TRACE, Amherst Pierpont Securities
Fiscal 1Q Relatively Resilient
VOD recently released its fiscal 1Q trading update with consolidated organic service revenues down 1.3% year-over-year, primarily reflecting COVID impacts to roaming due to travel restrictions. During the quarter, roaming and visitor revenue in Europe declined by roughly 70%. That said, while roaming is likely to be a negative impact for most of fiscal 2021, it remains a very small percentage of VOD’s overall revenue base. While total Europe organic service revenues were down 2.6%, Germany (VOD’s largest geographical unit in terms of revenues) witnessed flat organic service revenue growth. Additionally, VOD saw its seventh consecutive quarter of mobile contract customer loyalty and a record number of broadband customer additions in Europe. European mobile churn was 11.4%, down 90 bp sequentially and 340 bp year-over-year. VOD added 429k broadband customers in the quarter, bringing its total European broadband customers to 25.2 million.
Committed to Reducing Leverage
Management noted on its last earnings call that they remain focused on maintaining a robust balance sheet which includes bringing net leverage to the lower end of its 2.5x-3.0x target range. VOD ended the fiscal year with net debt of EUR 42.2 billion while net leverage stood at 2.8x. Leverage is a bit elevated post the company’s acquisition of the Liberty Global assets in Germany, Czech Republic, Hungary and Romania, which increased net debt by EUR 18.5 billion. VOD’s consistent free cash generation underpins its debt reduction strategy. VOD generated net free cash flow of roughly EUR 5.0 billion for the fiscal year ended 3/31/20 and has reiterated its guidance of at least EUR 5.0 billion in fiscal 2021. Management noted that its cost control focus and capital expenditure discipline should enable it to hits its free cash flow guidance for the year despite its expectations for adjusted EBITDA to be flat to slightly down.
Liquidity is Strong
VOD ended the fiscal year with over EUR 12 billion in cash and equivalents as well as EUR 7.7 billion of availability under its credit facilities. The company has yet to tap the debt market this year, unlike its peers, as it remains focused on reducing debt. Their debt maturity profile is very manageable this year with EUR 1.3 billion in debt and term loans maturing, a weighted average debt maturity of 15.96 years with a weighted average coupon of 3.46%. This compares favorably to the weighted average maturity of T’s debt profile of 15.07 years with a weighted average coupon of 3.99%.
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