Another rough session for Virgin Media O2. Its notes weakened on Friday, adding to a multiweek slide that has pushed the debt further into distress. The immediate spark this time was the UK competition regulator flagging concerns that Nexfibre Networks Ltd.'s plan to buy Netomnia Ltd. could harm competition, which has investors rethinking cash that was expected to reduce leverage at Virgin Media O2.
Bonds maturing in 2032 and 2033 are quoted a little above one third of face value, with declines topping 25 basis points since early October, per Bloomberg data. A vendor financing note maturing in July 2033 declined by up to 5.3 euro cents on Friday to 37.7 cents, leaving it worth roughly half of its early July level.
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The cost to insure the company's bonds has jumped, and those prices now imply default odds that are near certain in market terms. At the same time, the regulator's warning on the Nexfibre and Netomnia tie-up puts at risk a transaction expected to deliver about £1 billion to help deleverage Virgin Media O2. Backing for Nexfibre comes from Virgin Media shareholders Telefonica SA and Liberty Global Plc.
Bloomberg Intelligence estimates a roughly 40% chance the Nexfibre-Netomnia deal is blocked and a 60% chance it proceeds only with "strict remedies involving pricing and investment concessions that would dilute the deal's benefits," according to analyst Erhan Gurses. With speculation building that Virgin Media O2 may opt for a more forceful debt overhaul, the company and its shareholders have tried to reassure creditors, but that risk is front and center as prices sink. It is also another knock to fiber broadband bets.
Investors who poured billions into the space for steady returns are facing heavier competition from a wave of new entrants and the drag of higher borrowing costs. Many are still carrying losses from Altice France's restructuring and remember the hardball playbook associated with Patrick Drahi.
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