Virgin Media Inc., is the UK’s leading entertainment and communications company, holding the country’s number one market position in cable and ultrafast broadband. Virgin Media is listed on NASDAQ and the London Stock Exchange. It is the largest of the Virgin Group branded companies with almost 13,000 employees in the UK. For the year ended 31st December 2009, the company had total revenues of £3.8 billion. Treasury Today speaks to Rick Martin, Director of Investor Relations and Treasury, Virgin Media.
Rick Martin
Director of Investor Relations and Treasury
Rick joined ntl in March 2003 as Vice President – Financial Operations. In 2004, he was appointed Project Director for the disposition of the company’s Broadcast Division, generating proceeds of £1.2 billion in 2005. He assumed the role of Group Treasurer in August 2005. Rick played an important role in the merger of ntl and Telewest, through the attendant £5 billion bank and bond financing. Most recently, he and his team led the refinancing of the company’s £1.925 billion senior credit facility, completing the process of establishing a capital structure designed to meet Virgin Media’s needs for the foreseeable future.
At the start of 2007, Virgin Media was under intense pressure to refinance its debt ahead of some significant repayments due in 2010 (£1.1 billion) and 2011 (around £1 billion). Seventy-five percent of its debt was in short-term bank loans as it came into an unprecedented credit squeeze in the markets. Sceptics did not believe the company would be able to refinance the first £4.8 billion in of its debt. Its share price plummeted. “Our net leverage was 4.7 times EBITDA and 2007-09 bank amortisation alone was 5.3 times 2007 free cash flow,” recalls Rick Martin.
To the rescue came Eamonn O’Hare, Virgin Media’s finance director and his treasury team. The team was able to extend average debt maturity from four to nearly seven years, reducing scheduled payments from £4.8 billion by 2012 to £325m before 2013, with no single payment over £200m before 2015. The repayment profile changed to long-term bonds away from the banks – to 25% short-term and 75% long-term, a complete reversal of its payment profile. The share price rose 200%.
The company has fundamentally changed its capital structure, providing greater scope for the use of surplus future cash flow to drive growth. After capital expenditure and interest payments the company has, by its own definition, generated almost £350m a year in free cash flow. With the debt story behind them, the treasury at Virgin Media has to be nimble and opportunistic to ensure the right use of its surplus cash.
The small treasury team, headquartered in London, is split into operational and corporate finance departments, alongside the newer investor relations. An ERP-based treasury, one of the team’s current projects is investigating treasury systems. A shared service centre in Bradford, UK handles a degree of cash management including receipts and disbursements. Operational treasury covers short-term cash investing, detailed short-term cash flow forecasting out to 12 weeks, counterparty risk and movement of funds between the legal entities.
In the corporate finance division, the team drives treasury ideas and projects, including execution of any capital markets activities. The team does the longer term cash forecasting, juxtaposing long-range business plans with prospective financing and is also responsible for FX management and longer term hedging. In addition the team drives working capital management in a joint effort with the commercial finance teams. Treasury Today asked Rick Martin, Director of Investor Relations and Treasury, Virgin Media:
Can you describe the culture within treasury?
We’re a small squad. Counting the Investor Relations team, I have four direct reports and three people at one level down, so including me, that’s eight people managing £5.6 billion net debt, £400m in cash and an equity market cap of £3.8 billion, so that’s £10 billion across eight people. That means you have to perform as a team, you cannot act in silos. It’s very collegial. The distinction between the parts necessarily blurs – our approach is that skill sets take priority over historical duties.
How much does the Virgin brand influence that culture?
As the Virgin Group only has a stake plus representation on the board (Virgin Media pays a percentage of its revenues annually to the group to license the brand), each entity in the group has separate treasury functions. That said, the value of the Virgin brand goes much further than just commercial value to the business. Being part of the Virgin Group, we have access to huge resources and share best practices, as we don’t compete against each other. Because we are part of the Virgin brand, we embrace the Virgin values of which there are many, but I will single out three that come to mind:
- Innovative. An example was our approach to the debt markets in the refinancing.
- Brilliant. My direct reports are really intelligent, and street-smart as well.
- Fun. We have worked very hard the last three years but with a lot of laughs along the way.
The refinancing was quite an accomplishment. Can you highlight the major components?
During a very turbulent period, across the three years of the financing project, we issued $1 billion of convertible notes; £1.7 billion of senior unsecured notes; and £1.5 billion of senior secured notes. As a result, WAM is now up to 6.8 years, and WACD has reduced to 7.5%. We were able to tap into all levels of the capital markets from bank debt to quasi-equity, accessing optimal deals as opportunities arose.
The company fundamentally changed the capital structure of our business, providing much greater flexibility. We have had a massive drop in our CDS’s, and improvements to our credit ratings. The share price was the third-best performing stock on NASDAQ in 2009, and rallied from less than $4 in Q4 2008 to more recent levels of circa $16.
Now that the refinancing is behind you, what are the current challenges for treasury?
At a conceptual level, following on from the refinancing, is the happy challenge of moving from a debt-centric to an equity-centric company. We need to be thinking now about the company’s free cash flow and the ways to apply it, such as possible share buy-backs, increased dividends or investment in our broadband cable network in support of our more ambitious growth plans. It requires a sea change in mind set. What is the best way to optimise the use of cash going forward? It is a less pressured challenge but in some ways more complex than the refinancing.
A second area where we will focus more is counterparty risk. There is a great deal of uncertainty still out there. Our third challenge is taking a bigger role in the company’s operational results. As just one example, I am convinced that there is a further cash prize out there for additional improvements in working capital management. So while the refinancing had presented us with a single focus, now we have additional challenges with a different frame of mind – how to optimise going forward, keeping our eye on counterparty risk and the luxury of taking a greater role in the operational side of the business.
How did treasury cope with the intense pressure and market scepticism during the refinancing process and what lessons were learned?
When your share price dips below $4 a share, it would be silly to pretend that there is no scepticism out there. But my feeling was that we were cash generative and could work through the situation. Would it be expensive? Yes. Would it be hard work? Yes. And I had no proof of that eventual success to show people, other than that I knew it would be because we were starting from such a robust cash generative situation. I never lost faith that we could pull it off. At the same time, because of our SEC registration, we had to be very careful about forward-looking comments.
The biggest takeaway from those three years besides the huge appreciation of our banking business partners, my treasury team and both internal and external counsel, was that you have to be flexible about which part of the markets you tap, and when. You have to move quickly. You can’t wait for the very last basis point to change – you don’t wait for new rates. It is a case of carpe diem; seize the opportunity. You need to always be thinking two or three moves ahead, jointly with your business partners and advisors. What are the knock-on effects of a bond offering on other parts of the financing for example?
How much cash do you think a company needs to hold – any blanket advice?
I wouldn’t presume to advise other companies. It is a company-specific discussion with many variables: what is your leverage? What is the volatility of your business model? The nature of working capital in your business? How drawn is your revolving credit facility?
Inclusive of Virgin Media Television we have revenues of £3.8 billion, so we are a robust size. Our gearing is coming down. But I like to have a minimum of £150-200m cash balance. Not just because of our size, but also in the context of the current covenant definitions – at £200m I get maximum credit for our cash. But do we have to hold that much? The simple answer is no. We are blessed with a good revolving credit facility of £250m. So while we don’t always ‘need’ a balance of that size, there are good reasons to hold it.
We’re coming out of a recession, does that change the way you are investing or how you put that cash to work for you?
The short answer is yes and no. There are really two parts. First is the near term. We want to make sure that our cash (in excess of £420m Q1) is in safe investments and with a wide range of counterparties. Our team monitors CDS’s, and news flow, although the latter is anecdotal, and ratings for our counterparties. We have a hard and fast trigger – when CDS’s go above 200 basis points, we speak.
During the worst days of the crisis we had to make quick decisions (as those limits were breached), sometimes moving cash; sometimes not. We are aiming to maximise returns but still get safety within prescribed limits using a combination of overnights, money market funds etc. When I am feeling especially racy, usually if I have had two lattes, I maximise returns by investing out seven days! In seriousness, we manage to get the best returns for the levels of risk we are prepared to take.
In terms of risk management, in the medium to longer term as we move to being a more equity centric story we can contemplate options for our excess cash flow. How much, are we looking at? I would juxtapose that with prudence, in case of another downturn. I fail miserably as a treasurer if I lock it up long term at 0.25%. I should in that case be summarily dismissed. But it’s still early days from a longer term perspective as we just finished the refinancing. We still need to suss out a bit more where we want to be on the ratings spectrum, and by when.
Do you think treasury is getting more complex or easier? Are there developments out there that can help?
At a macro level, and I have been in the workforce for 27 years, I have never seen anything like the situation we have just been through. At one point our CDS’s were at 1900 bps. Volatility was unprecedented. But the tools available to manage that volatility have broadly kept up, at least for Virgin Media’s purposes. Today’s environment requires multiple moves in advance and giving opportunities for development to our team members so that they have the chance to learn new skills to make best use of those tools. We have gifted team members who not only have the desire to learn new skills, but the ability to apply them as well.
Tarot cards! No, seriously we would like the ability to evaluate and model complex derivatives in house with a ready-made tool. We currently have to do this on a bespoke basis. What exists out there already is really for those who are in this market constantly. Because of the cost, it’s a tool for investment banks, not a treasury like ours.
Aside from tools that make treasury easier or more efficient, how can treasury make a difference in terms of competitive advantage in the business?
How we work together as a team is an advantage. The team in commercial finance, treasury and legal where we jointly work together at an extraordinary level creates a virtual circle of continuing improvements in capital structure and operations. We have outstanding execution as a company. I am also a strong believer in cross-pollination of positions – where treasury should and can move to other line positions or more senior posts in the finance spectrum, but equally, operational colleagues take a turn in treasury. This benefits everyone individually, and the company.
Finally, how much do you think the wave of global and national regulation in response to the crisis will impact corporate business and treasury in particular?
Who knows what the regulators will cook up? As a company we are less about state-of-the-art tools and instead use good, well-timed and well-known diagnostic tools. And I don’t see anything in the regulation proposed that will crimp our use of those.
But I do foresee increased regulation driving an increase in the cost of capital without them making the financial markets any safer. What we need is transparency, not more prescriptive rules. I am a grown up, and if there is transparency, I can make a decision, but what I would like to see more of is transparency in my counterparties.
