- Trading desks at Goldman Sachs and Morgan Stanley have taken opposite sides on Virgin Media O2’s bonds, which have fallen deep into distressed territory during a 10-day rout. Goldman traders see much of the bad news as priced in, including the risk that UK regulators block Nexfibre’s acquisition of Netomnia and deprive the company of expected cash proceeds. Morgan Stanley’s desk is recommending investors sell or short.
- The disagreement rests on one estimate. Morgan Stanley traders calculate Virgin Media can sustain only about £14 billion, roughly $18.5 billion, of debt against the approximately £22 billion recently reported, a gap of around £8 billion or 36%. They view a liability management exercise leaving creditors worse off as a likely outcome.
- The selloff reaches well beyond one borrower. As of October 9 Virgin Media was the seventh-largest member of the Bloomberg Pan-European High Yield Index, its 11 sterling and euro bonds accounting for more than 1.2% of the gauge, so holders of European high yield funds own this position regardless of their view on it.
- Goldman traders, who were recommending some shorter-maturity bonds last month, point to other deleveraging options including a network spinoff and cuts to capital and operating spending. Morgan Stanley argues the company cannot deleverage fast enough before maturities begin falling due in 2029, and that refinancing would come at a steep price.
What Happened?
The Netomnia deal remains live, with the Competition and Markets Authority due to rule by December 15, following an October 16 deadline for proposed remedies and an October 23 deadline for public comments on interim findings. Virgin Media reports third quarter results on November 3. Morgan Stanley traders argue regulatory approval would buy time but would not by itself prevent a debt overhaul. Asked at a London conference last week whether they would commit to not carrying out a liability management exercise, Liberty Global management said they are not at the stage of making those decisions. Morgan Stanley declined to comment and Goldman Sachs did not respond.
Why It Matters?
The precedent is two weeks old and in the same industry. TalkTalk, another UK telecom operator carrying debt accumulated during the shift from copper to fibre, went through pre-pack administration with roughly £628 million of first-lien bonds and £332 million of second-lien securities extinguished in full, and those first-lien bonds had been quoted at around 65 cents on the pound just a month before going to zero. Anyone taking comfort from current Virgin Media bond prices should understand how quickly a quoted level in this sector has recently become nothing. The circumstances differ, Virgin Media is far larger and has more options, but the mechanism by which a distressed UK telecom resolves is no longer hypothetical. The index weighting is the read-through for ordinary investors and it is the third instance this month of the same problem. Virgin Media at over 1.2% of the Pan-European High Yield Index follows AT&T and Verizon ranking third and fourth among nonfinancial issuers in the US high-grade index as their spreads widened on SpaceX’s wireless plans, and BlackRock’s model team moving more than $1 billion out of a mortgage ETF. Bond index weights are set by who borrows most, not by who is safest, so passive fixed income concentrates exposure in the most indebted issuers by construction. On the substance, the £8 billion gap is the whole argument. If Morgan Stanley’s capacity estimate is right, a restructuring that impairs creditors is arithmetic rather than speculation. Goldman’s position is not that the debt is sustainable but that the price already reflects the risk, which is a different claim and one that can be correct even if Morgan Stanley’s analysis is too. Liberty Global declining to rule out a liability management exercise when asked directly is not a denial.
What Next?
The calendar is unusually clear. October 16 is the deadline for remedies addressing CMA concerns, October 23 closes public comment on interim findings, third quarter results land November 3, and the final CMA ruling is due December 15. Each is a potential catalyst in either direction. Watch whether Virgin Media announces a network spinoff or capital spending cuts, since those are the levers Goldman traders are relying on. For holders of European high yield funds, the practical step is establishing what exposure the fund carries and whether the manager has a view, given the index weighting puts it there automatically. The 2029 maturity wall is the deadline that ultimately forces a decision.
Affected Tickers and Coins: MS, GS, LBTYA, TEF
Source: Bloomberg
