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Moody's downgrade VOD to Baa2. Cite "negative outlook"

lse:vod

#1

Moody’s downgrade today impacting SP. Was back down near to 10-year closing lows of 135.08 seen 29th January. Only 136+ as I write. Though one’s almost grown accustomed to setbacks with VOD, it’s still a huge disappointment.

Whilst markets often see many stocks oversold & overbought at various times, it’s getting harder to shrug off some prevailing concerns surrounding VOD. Debt is indeed high, revenues falling, competition increasing & bringing down prices, whilst some key markets face economic downturns.

From what I’ve seen during my involvement in markets since 2009, technology stocks are notorious for running into difficulties after longer periods of relative calm. One reason is that technology changes fast. Tech companies frequently need to make huge fresh investments just to keep up. That’s fine as long as revenues also increase & debt is manageable. But when debt is high & revenues fall, as in VOD’s case, then we have alarm bells. Then negative sentiment can dominate for longer periods.

Whilst all BBs of high-yielders tend to see plenty of comment from long-term investors, so bullishness dominates as we’d expect, it’s important to recognise that any of us can fall into occasional confirmation bias where mostly positives are highlighted. I’m sure I’ve done so a few times. Thus issues like high debt can be understated as very manageable, when in reality things can get even worse fairly quickly as upgrading to new tech tends to be expensive.

After reading so many times that circa 143 was a bottom here, then 135, I’m now wondering where we go from here? I’m also considering reducing or pulling out altogether at some point if we see further bad news & more SP falls on much higher than average volume. Latter would suggest more large funds pulling out.

If I do so, I’ll immediately re-enter my VOD funds into a stock that seems likely to return my losses on VOD. Despite yield taken here, those are significant. But that’s not a decision for today with SP near 10-year lows.

FWIW, most brokers seem equally perplexed about this as most of us. VOD’s targets range from 125 to as high as Goldman’s 300. One can’t help but question their credibility. Though one doesn’t expect consensus, such extreme variance suggests very different methods of determining forecasts, to say the least.

JD holding on & no rash actions planned. But despite a high yield, one needs to keep a close eye on this if mounting paper losses are a concern. I hold both shares & leveraged longs here, so my take on that aspect will be obvious enough. As are the potential perils of leverage. - GLA.


#2

Hi All,

Vodafone issuing yet another bond…

https://www.bloomberg.com/news/articles/2019-03-04/vodafone-is-said-to-plan-3-billion-euro-convertible-bond-sale

As if they haven’t got enough debt already. Shares dipped 2% on the news according to another article I read.

ATB

Pref


#3

Bloomberg article dates to yesterday, where we did see a 3p fall.
So far today the bounce has exceeded that fall, so perhaps the reasons for taking the debt outweigh the fact of the debt?


#4

@PrefInvestor1,

Indeed. Though in fairness, as they’re hoping the $22 billion Liberty Deal is likely to be approved by the EU by 2nd May, raising more funds is unavoidable. But I agree, increased debt combined with falling revenues is never a good thing. Hence the recent loss of market confidence & sharp drops in SP down to new 10-year lows. Closed a very disappointing 131.36 yesterday.

If there’s one plus about raising funds by offering convertibles, which has also been a mainstay of VOD’s business model for many years, it’s that it avoids adding to banking debt. Latter always far more risky. Then by the time these latest convertibles mature in March 2021 & 2022, VOD typically does a buyback to avoid further dilution.

But one does wonder what would happen to VOD’s SP in the short-term if the Liberty Deal wasn’t approved & instead they could use part of their planned huge investment there to pay off more debt faster? - GL.


#5

It is up today by over 3%:


#6

I believe the the bond issue was at a 1.5-2% coupon. I guess that’s far from being “junk”.

DL


#7

Interesting article & a fairly positive take on VOD raising funds via more convertible bonds. - GLA.

https://www.bloomberg.com/opinion/articles/2019-03-05/vodafone-s-4-5-billion-happy-meal-for-hedge-funds


#8

The two sets of bonds are being marketed with coupons of roughly 1.6 percent and 1.9 percent, and strong demand could see them price even lower. (By comparison, Vodafone pays less than 0.5 percent to borrow for the same period in the European bond market.)

These mandatory bonds usually offer much higher premiums. That’s because investors typically get lower capital gains than they would from simply buying the shares, and a higher yield is needed to compensate for that. Here, Vodafone is opting for a structure that gives investors all the upside if the shares skyrocket simply to reduce the costs for itself.

That was the thing that surprised me, I thought the coupon would be higher.

DL


#9

I don’t really agree on that. I was going to buy this stock but this deal is a lot of lipstick on a pig .

Most articles agree that borrowing for it would strain credit. The cashfcash flow isn’t really there to do it direct (financials weak).

They are basically put my that profits will be better by 2021. And even Then, borrow money when they hope credit rating would be less affected, to pay off maturities etc.

Basically it’s a format to paper over weaknesses.

If funds do give him the multi billions, I’d think they would consider this SP way too high to do it. Imo


#10

US 2 days very negative rises. . A big drop must be imminent this week


#11

@beansfordinner,

Note that, VOD have issued convertible bonds a few times previously & going back years. It’s a preferred way to raise funds rather than taking on more risky banking debt. They need more funds to finance the $22 billion Liberty Deal, latter pending approval by the EU by 2nd May & further expansion of 5G. This will allow them to offer more lucrative services in wider markets & is expected to generate increased revenues.

I agree that increasing debt burden is never entirely risk-free, but not hard to figure out why VOD have felt it necessary.

Though SP closed higher again at 139.40, we’ve also potential resistance ahead at 142+ from February. GL.


#12

Personally I don’t see it as support . Could be very wrong but I do see a very common occurrence here. A gapping buy rush to try get a buffer into the ex div price. I think the bears will feel as validated to build shorts as the bulls to buy lows so will be interesting. But the green day run on vod from low, imo, very negative. Not for buyers who can get out from days ago. But certainly for later buyers. All past supports were broken easily. Now the tests will come as resistance. See if bears truly remain here.


#13

@beansfordinner

Short-term resistance at 142+ going back a few weeks seems broken. Not saying it can’t reverse, but mere observation. SP closed 143.56 on VG volume today. Over 145m v average over 73m. Strong volume always an added plus. So things looking a lot better tonight for VOD holders.

However, I’ll be reducing at some point. I’ve longs from 133.48 to well over 200. I’ll book some gains in due course purely from a trader’s viewpoint, not an investor’s. No advice intended to others. - GL.


#14

Personally im expecting a case of many small green days up to be followed by a massive, one red down. That red gobbling up many of the green days.

This will most likely occur regardless. So it’s just after that initial sell off, il be deciding if to buy and hold, or not.

Needless to say it may not happen. But would be common given historic norms in same scenarios.

If that big red day does not come to analyse it, then we’ll done to the brave here.