Fitch Affirms TV Azteca at 'BB-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed TV Azteca, S.A.B. de CV's (TV Azteca) Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDR) at 'BB-' with a Stable Outlook. Fitch has also affirmed the company's senior unsecured debt at 'BB-'.

KEY RATING DRIVERS

TV Azteca's ratings reflect its business position as the second largest TV broadcaster in Mexico, with an over 30% market share, and one of the two largest Spanish-language contents producers in the world. The ratings also reflect the company's moderate financial leverage for the rating level, as well as its large cash balance which fully supports its strategic investments. The ratings also take into consideration the controlling ownership by the Salinas family and track record of transactions with related entities. The company's ratings are tempered by the increasing competitive pressure from alternative advertisement platforms and the potential new entrants to the market amid the industry maturity, all of which have and will continue to erode its operating margins and to increase leverage, and the lack of revenue diversification.

Slow Growth Ahead: TV Azteca's mid- to long-term advertisement revenue growth will become slow as the Mexican broadcasting industry matures and other platforms, such as internet, continue to attract advertisers. Although the over-the-air broadcasting still remains the most effective advertising platform given the high penetrations of TV in the Mexican households, its revenue portion out of the total advertisement industry has gradually declined to 53% from over 60% in the past. Fitch forecasts the company's revenue growth in 2014 will be high, in the low-teens, due to Brazil World Cup; however, the growth will become weaker for the medium term in the absence of any special event. In 2013, the company's sales contracted by 4% mainly as the government's advertisement spending fell following the presidential election year in 2012.

Negative Long-term Reform Impact: Fitch believes that the media sector reform will be negative for TV Azteca in the long term as the competitive pressure increases from the two new entrants. This will add pressure to the company's revenue growth and operating margins. However, Fitch does not foresee any material short-term negative impact as TV Azteca was not declared as 'preponderant' by the regulator and the unfavorable asymmetrical regulations were mostly imposed on the largest broadcaster, Grupo Televisa. In addition, the advertisers will prefer to buy advertisement slots from TV Azteca than from the new broadcasters as its quality contents producing ability remains intact. Fitch believes that it will take significant time and resources for the new entrants to be competitive against TV Azteca and Grupo Televisa. Therefore, any significant loss in TV Azteca's market share is unlikely over the medium term.

Margin Erosion: Fitch forecasts the company's EBITDA margin to remain below 30% without any meaningful recovery in 2014 and 2015. The contents cost, including both in-house production and purchased rights, has been steadily increasing accounting for almost 57% of the total sales in 2013 from less than 50% in 2011. The cost structure is likely to be pressured should the new entrants compete over production talents. Also, the increasing revenue contribution from the lower margin Colombian telecom operation will negatively impact the margins. In 2013, the company's EBITDA margin, calculated by Fitch, fell to 29% from 33% in 2012. The downward trend continued in the first quarter of 2014, the slowest quarter of the year, as the margin fell to 21% from 25% a year ago.

Heightened but Moderate Leverage: TV Azteca's financial net leverage is likely to increase towards 2x over the medium term due to a high level of investment cash outflows related with the digitalization, Colombian fiber optic project, as well as investments into Azteca America. These investments will be funded with the company's free cash flow generations and cash on hand without any external financing. Fitch believes that the projected increase in the leverage ratio is still in line with its rating level. At Dec. 31, 2013, the company's financial net leverage, measured by net debt to EBITDA, was 1.8x, up from 0.8x in 2012, due to the significant increase in the working capital, mainly exhibition right purchases.

Positive Service/Geographical Diversification: TV Azteca will benefit from cash flow diversification with its fiber optic network projects in Colombia and Peru with the support from their governments. The overseas expansion into the fixed-line telecom operations can help mitigate the risk stemming from the increasing competitive pressure in its domestic broadcasting operations to a certain extent although the contribution will remain small for the medium term. The company plans to increase the revenue portion from this segment to 10% in the long term.

Good Liquidity: The company's liquidity profile is sound in light of its MXN6 billion cash balance without any short-term debt as of March 31, 2014. The company does not face any debt maturity until 2018, which provides comfort even as the company uses its cash balance to support the strategic investments in the short to medium term. Fitch also expects the company to maintain robust cash balances supporting its financial flexibility.

RATING SENSITIVITIES

A Negative rating action could be considered in the case of any material market share loss and margin erosion, as well as weaker cash generation due to aggressive strategic investments and/or shareholder returns. A negative rating action could also be considered if the likelihood of a breach of the financial covenant breach that limits the company's debt to EBITDA below 3.0x increases. Also, any related party transactions that can lead to a material deterioration in the company's financial profile can result in a negative rating action.

Factors that could lead to a positive rating action include a combination of the following: additional profitable business lines contributing to improvement in cash flow generation, consistently low leverage through the cycle, sustained increase in market share that would lead to higher cash generation allowing the company to withstand its large working capital requirement.

Additional information is available on www.fitchratings.com

Applicable Criteria and Related Research

--'Corporate Rating Methodology' (Aug 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology -- Effective 12 August 2011 to 8 August 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Additional Disclosure

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Contacts

Fitch Ratings
Primary Analyst
Alvin Lim, CFA, +1-312-368-3114
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Gilberto Gonzalez, +52-81-8399-9100
Associate Director
or
Committee Chairperson
Daniel Kastholm, CFA, +1-312-368-2070
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Alvin Lim, CFA, +1-312-368-3114
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Gilberto Gonzalez, +52-81-8399-9100
Associate Director
or
Committee Chairperson
Daniel Kastholm, CFA, +1-312-368-2070
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com