Virgin Media O2 bonds slide as broadband rivals squeeze cash flow
Telecoms group’s bonds tumble as altnets take market share and investors fret over £2bn Netomnia deal
Bonds issued by Virgin Media O2 have slumped as credit investors grow concerned that intense competition in the UK’s broadband market and a £2bn acquisition by its parent companies will squeeze the indebted group’s cash flow.
The price of VMO2’s €1.81bn bond due in 2032 has dropped from above par to an all-time low of 91 cents on the euro over the past six months. Investors are now demanding a yield of almost 9 per cent to hold the company’s long-dated debt.
The UK’s broadband providers are under pressure from rising network development costs and lower than expected uptake of fibre services. VMO2, jointly owned by Telefónica and Liberty Global, has also been squeezed by “altnet” providers that have undercut their prices and poached their customers.
The challenges have resulted in a jump in the cost of insuring against a default of VMO2, which carries more than £20bn of debt.
The spread on the company’s five-year credit default swap climbed to 622 basis points this month, its highest level since 2010. The price of VMO2’s CDS has risen faster than that of any company tracked by the iTraxx Crossover — an index of 75 European junk-rated corporates — so far this year.
Tom Steabler, senior credit analyst at Federated Hermes, said VMO2 had underperformed relative to peers, and that its revenue and earnings are expected to decline by between 3 and 5 per cent this year.
VMO2 made a £1.75bn pre-tax loss in 2025 according to its consolidated accounts, down from a £2mn profit the year before. It recorded a goodwill impairment charge of £1bn during the year, “primarily related to the impacts of the UK market and macroeconomic conditions in the UK on estimated future cash flows”.
The UK’s altnets, which have proliferated since Ofcom took steps to encourage more competition in the sector in 2021, have raised £31bn over the past decade to fund their expansion.
Rating agency Fitch this month downgraded VMO2’s long-term credit rating further into junk territory, from BB- to B+, because of its “high leverage” and declining revenue and profit. The rating agency said it expects VMO2’s leverage, the ratio of debt to ebitda, to “rise above 6.0x over the next two years”.
The downgrade excluded the impact from the £2bn acquisition of Netomnia, the UK’s fourth-largest broadband network, by VMO2’s parent companies.
VMO2’s owners are joining forces with private equity firm InfraVia Capital to buy Netomnia through their fibre joint venture Nexfibre.
As part of the deal VMO2 will 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. However, it will have to pay fees to access Nexfibre’s network in future.
While the upfront cash will allow VMO2 to finance its debts in the short term, investors are worried by the longer-term hit from the access fees.
New Street Research analyst James Ratzer estimates they will eventually amount to £250mn per year and reduce VMO2’s free cash flow from £200mn in 2026 to about £80mn in 2028.
Virgin Media O2 said it has a “robust capital structure” and that it “continues to invest heavily in our business to lay strong foundations for the years ahead”.
It added that the Netomnia deal was “a value accretive win-win for both parties . . . the combined Virgin Media O2 and Nexfibre fibre footprint is set to expand to 20 million [homes] in future, positioning us as the single biggest competitor to Openreach”.