Photo of Eleanor Hill and Rick Martin, Virgin Media.
The continuing optimisation of Virgin Media’s debt complex has already delivered reductions in the company’s annual interest expense of more than £60m. This contributes in a meaningful way to Virgin Media’s 20% growth in annual free cash flow and also helps in freeing up cash for investment in the business and returns of capital to shareholders.
Group Director Treasury and Investor Relations
Virgin Media is the first provider of all four broadband, TV, mobile phone and home phone services in the UK. The company’s cable network – the result of a multi-billion pound private investment – delivers next generation entertainment and communications services to over half of all households in the country. Virgin Media is a previous winner in the Best Corporate Debt Solution category in 2010.
More broadly, these actions fit within a longer-term capital structure strategy that the company has adopted. This has meant that the company has been able to reduce its weighted average cost of debt from 7.7% to 6.3% and extend its weighted average maturity from just over four years to more than six years.
Virgin has also achieved the only investment grade rating on European cable paper, reduced margins on its senior bank loan to provide an all-in cost of funds of circa 2.5% and issued ten-year secured bonds with a coupon of 5.25%. Moreover, in Q1 2012, the company issued ten-year unsecured bonds at the same 5.25% coupon. This last transaction in particular set multiple records when issued for a sub-investment grade offering.
“Our debt structure is the envy of the crossover credit arena and we believe no other company of similar leverage has achieved as much across the Awards period. Such actions drive the optimisation of the company’s debt structure, and address publicly-stated long-term goals for our capital structure generally. Our successes include: steady progress toward circa three times net leverage by mid-2013, reducing the cost and extending the tenor of our debt complex; ability to continue prudent investment in the business, thus preserving and expanding our competitive advantages; providing attractive returns of capital to equity holders,” explains Rick Martin, Group Director Treasury and Investor Relations at Virgin Media.
In terms of optimising its leverage, as of year-end 2011 the company’s net debt to trailing 12 months EBITDA was 3.5 times, and the treasury remains committed to achievement of the circa three times target. “We were upgraded by all three rating agencies in February 2011 and placed on positive outlook by S&P in February 2012. Additionally, our senior bank loan includes a £450m revolver component, representing clear manifestation of the strong relationships we enjoy with our lenders,” says Martin.
The unsecured 5.25% bonds due 2022 represented at issue the second-lowest yielding M&T deal that had ever been done and the second-lowest yielding BB-rated deal ever. The company has also retired a $550m tranche of its 9.125% debt in the past year – with cash from the balance sheet. The recent issuance of 5.25% ten-year unsecured debt funded the partial retirement of outstanding 9.5% debt. Finally, prudent hedging has shielded the company from what would otherwise have been an increase of more than £60m in net debt. Last year saw the company invest more than £750m in fixed asset additions. The company was also able to return £700m of capital to shareholders through its dividend and repurchase programme. This represents the most expensive part of the company’s capital structure, and further reduces Virgin Media’s overall weighted average cost of capital, which benefits all of the company’s stakeholders.
This success has been achieved jointly with the company’s relationship banks. “We enjoy wonderful relationships with our banks and advisors, which have provided both balance sheet, and expertise in executing debt capital markets transactions. In alphabetical order, they are Bank of America Merrill Lynch, BNP Paribas, Crédit Agricole, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan, Lloyds, RBS, and UBS. We have also benefited greatly from the advice provided by Tim Peterson at the law firm Milbank Tweed.”