Virgin Media: The Credit Squeeze Is On

Pity the poor Virgin Media (VMED) shareholders: just as it looked as if the Gods of Private Equity were smiling down on them the credit markets have taken a turn for the worse and the chances of quick exit seem to be diminishing by the day.

Partially soothing the pain, there were a couple of positives in Wednesday’s Q2 results: net debt had only increased by £19m in the quarter to £5,786m and OCF grew to £315m from £306m in the previous quarter. People can debate the customer numbers until they are blue in the teeth but these are the most important two figures that Virgin Media release every quarter. This is because the gigantic £4,970m credit facility has certain stringent covenants attached: one of which is the leverage covenant which currently stands at 5.25x – with a rolling 12-month OCF of £1,252m, the ratio currently stands at 4.62x. This gives Virgin Media a certain amount of breathing space – the rolling 12-month OCF figure would have to drop by approx. £150m to breach the covenants at current debt levels. In other words, things would have to get a lot worse in the marketplace for Virgin Media to be in any danger.

However the credit facility has a repayment schedule attached to it and unfortunately for Virgin Media shareholders £237m has to be repaid on 30th September 2007, followed by another £237m in March 2008, followed by another £237m in September 2008 and so on until 2011. As at 30th June 2007, Virgin Media had £277m of cash so can probably make the first repayment in September, but the Mar 2008 payment? I seriously doubt it with the current cashflows and I’m not expecting the marketplace is going to get any easier in the short or medium term.

All this means is that sometime soon, Virgin Media will have to sit down with the bankers and rearrange the credit facility – not a nice prospect when there currently is a credit squeeze. For sure, the bankers won’t let Virgin Media go under for a second time, but I expect they will want a pound of flesh – interest rates and facility fees are bound to increase.

The only other real option for Virgin Media is to sell out to probably a trade buyer and John Malone, the Darth Vader of the Cable Industry is waiting in the wings and will probably buy any Euro Cable Asset if the price is right. In fact, he is probably the only person on the planet who could give the BSkyB juggernaut a run for its money. Come to think about it, wasn’t Darth Vader and the Death Star on the same side?

Update: From the 10-Q SEC filing just released, it looks as if the CFO has refinanced just in the nick of time…

In April 2007, we amended the senior credit facility and borrowed an additional £890 million under a 5½ year bullet Tranche B5 term loan facility and a 5½ year Tranche B6 term loan facility. We used the net proceeds to repay some of our obligations under the Tranche A and Tranche A1 term loan facilities.

After giving effect to the refinancing in April 2007, the principal payments are scheduled as follows:

• March 31, 2009 - £2.5m
• September 30, 2009 - £474.5m
• March 31, 2010 £526.5m
• September 30, 2010 - £579.4m
• March 3, 2011 - £966.0m
• September 3, 2012 - £-2,203.7m
• March 3, 2013 - £300.0m

Even if Virgin Media don't generate the £475m needed to refinance between now and Sept 2009, the credit squeeze will be more than likely over and they can continue limping along.

VMED 1-yr chart: