DBRS Upgrades mmO2 plc Unsecured Notes to BBB (high)p

Dominion Bond Rating Service (“DBRS”) has today upgraded the rating of mmo2 plc (“O2” or the “Company”) to BBB (high)p from BBBp. With the upgrade, the trend has now been changed to Stable from Positive.

DBRS’s upgrade to BBB (high) reflects a proven management track record since 2002 that has resulted in strong growth in absolute EBITDA to a current level of ₤1.768 billion, driven by a 32% increase in subscribers over the past two years. In addition, during this period of growth, overall EBITDA margins have also increased, reflecting a focus on lowering customer acquisition costs and maintaining average revenue per unit (ARPU) in a highly competitive environment. Therefore, DBRS believes that O2 has realized the majority of its operating potential in its current configuration through improvements in its German operations while maintaining its competitive stature in the U.K. and Ireland.

The Company continues to maintain a capital structure that gives it considerable financial flexibility, with debt levels that are quite low in comparison to many other European wireless operators. Finally, DBRS believes that O2 has demonstrated that it can generate free cash flow on a sustainable basis, which has now allowed it to implement a dividend payout to its common shareholders. This payout is facilitated through a reorganization that created a new holding company, O2 plc, on March 14, 2005, allowing the Company to create distributable reserves that can now be paid out.

Given O2’s unique position as a wireless operator without direct affiliation to a wireline operator (and the highly competitive nature of both the U.K. and German markets) the Company’s Unsecured Notes rating is likely limited to the BBB (high) category given the Company’s current configuration. With the implementation of the dividend in fiscal 2006, gross free cash flow is expected to be close to break-even. However, the Company has indicated that dividends will be based on a percentage of core net income (excluding goodwill amortization, one-time items, and licence amortization), therefore, adjustments can be made if conditions warrant. As a result, debt levels are expected to remain near current levels for the near term. In the longer term, DBRS does acknowledge that O2’s debt levels will likely rise to reflect a more permanent capital structure. However, the expectation is that future credit metrics would still be indicative of the BBB (high) category.

Note:
p - This rating is based on public information.