The UK company formed from NTL, Telewest and Virgin has been busy in the corporate bond markets.
There was another marker on the erratic road to recovery when Europe's high-yield corporate bond market reopened at the end of May. The issuer that led the way was Virgin Media, which raised the equivalent of $1bn in seven-year notes. Naturally, it had to pay for the privilege.
Virgin Media is the largest cable company in the UK. In fact, it is the only one left of any size, the result of multiple mergers; NTL and Telewest merged in March 2006, acquired Virgin Mobile a few months later, and the whole was eventually renamed Virgin Media. Since then, Virgin Media has been one of the more interesting features of the loan market. Merger funding was provided by a series of loans - term loan A (£3.375bn [$5.52bn] with repayments in 2009, 2010 and 2011), term loan B (£1.2bn due in 2012), and a more subordinate term loan C (£300m due in 2013). The company also issued the equivalent of £300m in US dollar high-yield bonds, maturing in 2016.
Before its latest bond issue, Virgin Media had prepaid some £700m of loans A and B out of free cashflow. In 2007 it repaid nearly £900m of loan A by tapping loan B. And in April 2008 it issued $1bn of convertible bonds, also maturing in 2016, to pay down another £504m.
Deferral request
By autumn 2008, as the banking outlook turned really grim, Virgin Media decided to give itself more headroom. It asked A lenders to defer repayment until 2012 in return for an increased margin and an upfront fee. And it asked B lenders to surrender their right to a pro rata share of any voluntary prepayments on the A debt. "The idea was that, in future, any voluntary prepayments would be more effective if applied to loan A rather than loan B," explains Rick Martin, Virgin Media's treasurer. "A considerable proportion of both A and B lenders accepted the revised terms."
The lenders also agreed to future high-yield bond offerings if the proceeds were used to pay off their debt, which brings us back to the reopening of Europe's junk bond market. Virgin Media's on-the-run bonds had rallied strongly after their post-Lehman lows and, after lengthy internal discussions, the board agreed it was worth seizing the opportunity to refinance some of the debt.
The business has been having a good run, with churn rates at record lows and average revenue per user (another key figure in the industry) increasing steadily. Added to that, investors find cable operators attractive in the current environment. "We have stability of cash flow, positive free cash flow and we are seen as a defensive play," says Mr Martin.
It was decided to issue in US dollars and euros. US investors are reasonably familiar with the name, not least because Virgin Media is listed on Nasdaq. "The dollar market is still the largest and most liquid," Mr Martin points out. "And we feel comfortable about approaching the euro market."
So in late May, with Deutsche Bank and JPMorgan as bookrunners, the order books were opened. The deal was "massively" oversubscribed, according to one banker. Rated B2/B-/BB, the bonds offered a coupon of 9.5% and a maturity date of August 2016. "We wanted the high-yield debt to sit inside the convertible bonds, which mature in November 2016," says Mr Martin.
After increasing the planned size of the issue, a tranche of $750m was priced at 721 basis points (bps) over US Treasuries, and another of €180m at 712.6bps over Bunds.
The size of the dollar tranche was increased as much as possible to minimise swapping costs. The proceeds of about £600m will be used entirely to pay down senior bank debt which, at the end of the first quarter, stood at £1.82bn (loan A) and £2.067bn (loan B). Total debt, including outstanding bonds, is just under £6bn.
Mr Martin says that the company is prepared to tap the equity and quasi-equity markets but remains mindful of the fact that debt is routinely a cheaper form of capital. "So you can expect a natural bias towards debt capital markets rather than equity capital markets activity," he says.
Debt investors can expect to see the name again in the primary market. "We will continue to be very opportunistic," says Mr Martin. "If there is an opportunity for a cost-effective improvement in our capital structure, we'll take it to the board and have a good discussion."
