Virgin Media O2 bonds slide as UK broadband competition and Netomnia deal pressure cash flow

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Virgin Media O2 bonds slide

Highlights

Virgin Media O2’s €1.81bn bond due 2032 drops to 91 cents as yield nears 9 percent amid intensified UK broadband competition and credit concerns.
Fitch downgrades Virgin Media O2’s long-term rating to B+ due to high leverage and projected revenue and profit declines, with expected leverage rising above 6.0x in two years.
Virgin Media O2 will receive £1.1bn cash and a 15 percent Nexfibre stake from the £2bn Netomnia deal, but annual access fees could reduce free cash flow from £200mn in 2026 to £80mn by 2028.

Bond decline and credit pressure deepen

As reported by Financial Times, Virgin Media O2’s €1.81bn bond due in 2032 has fallen from above par to an all-time low of 91 cents on the euro over the past six months, with investors now demanding a yield of almost 9 per cent to hold the long-dated debt.

The telecoms group is facing a tougher market as broadband providers across the UK come under pressure from rising network build costs and lower than expected take-up of fibre services. Virgin Media O2, which is jointly owned by Telefónica and Liberty Global, is also being squeezed by alternative network providers that are undercutting prices and taking customers.

That backdrop is feeding through to credit markets. The spread on the company’s five-year credit default swap climbs to 622 basis points this month, its highest level since 2010, while its CDS price rises faster than that of any company tracked by the iTraxx Crossover index so far this year.

Tom Steabler, senior credit analyst at Federated Hermes, says Virgin Media O2 has underperformed relative to peers, with revenue and earnings expected to decline by between 3 and 5 per cent this year. According to its consolidated accounts, the company makes a £1.75bn pre-tax loss in 2025, compared with a £2mn profit a year earlier, including a £1bn goodwill impairment tied primarily to UK market and macroeconomic conditions affecting estimated future cash flows.

Fitch this month downgrades Virgin Media O2’s long-term credit rating from BB- to B+, citing high leverage and declining revenue and profit. The rating agency says it expects leverage, measured as debt to EBITDA, to rise above 6.0x over the next two years.

Netomnia transaction sharpens longer-term cash flow worries

The rating downgrade excludes the effect of the £2bn acquisition of Netomnia, the UK’s fourth-largest broadband network, by Virgin Media O2’s parent companies. Telefónica and Liberty Global are teaming up with private equity firm InfraVia Capital to buy Netomnia through their fibre joint venture Nexfibre.

Under the deal, Virgin Media O2 is set to receive £1.1bn in cash and a 15 per cent equity stake in Nexfibre in exchange for migrating traffic from 4.6 million homes to the joint venture’s network. But the company will also have to pay fees to access Nexfibre’s network in future, a point that is driving concern among investors despite the near-term cash benefit.

New Street Research analyst James Ratzer estimates those access fees will eventually total £250mn a year and cut Virgin Media O2’s free cash flow from £200mn in 2026 to about £80mn in 2028. That outlook adds to broader pressure in a UK fibre market where alternative network operators have raised £31bn over the past decade, helped by regulatory moves from Ofcom in 2021 to encourage more competition.

Virgin Media O2 says it has a robust capital structure and continues to invest heavily in the business to lay strong foundations for the years ahead. It adds that the Netomnia deal is a value-accretive outcome for both parties and says the combined Virgin Media O2 and Nexfibre fibre footprint is set to expand to 20 million homes, strengthening its challenge to Openreach.

Our earlier coverage of UK political and market risks explained how leadership uncertainty and shifting fiscal expectations were feeding through to gilt yields, inflation views and borrowing costs. We also noted that investors were reassessing risk across assets — from equities to bonds — as rate expectations and policy signals remained fluid, with knock-on effects for mortgage pricing and market sentiment.

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