NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'B' Issuer Default Rating (IDR) assigned to Univision Communications, Inc. (Univision). Fitch also affirmed the individual issue ratings of Univision (as outlined below). The Rating Outlook is Stable. As of March 31, 2014, Univision had approximately $10.6 billion of debt outstanding (including the subordinated convertible preferred debentures due to Televisa).
KEY RATING DRIVERS:
The ratings incorporate Fitch's positive view of the U.S. Hispanic broadcasting industry, given anticipated continued growth in the number and spending power of the Hispanic demographic. Additionally, Univision benefits from a premier industry position, with duopoly television and radio stations in most of the top Hispanic markets, with a national overlay of broadcast and cable networks. The company's networks garner significant market share of Hispanic viewers and generate strong and stable ratings. This large and concentrated audience provides advertisers with an effective way to reach the growing U.S. Hispanic population.
Fitch expects Hispanic population growth to mitigate the impact of longer-term secular issues that are challenging the overall media & entertainment sector, namely, audience fragmentation and its impact on advertising revenue. While the Hispanic broadcast television audience is not immune to these pressures, Fitch expects the growing total size of the Hispanic population, and Univision's investments in digital services, will provide an offset to the impact of audience fragmentation and drive ongoing ratings strength at Univision's television properties.
Fitch believes Univision's cost management efforts and growth in high-margin retransmission revenue will provide an offset to the rising programing investments. Fitch expects EBITDA margins levels in the 38% to 40% range in 2014. Long-term, Fitch believes positive operating leverage from topline growth and growth in high-margin retransmission revenue will support continued content and digital investments, with EBITDA margins at or near the 40% level.
Recent new entrants in the Hispanic broadcast and cable network market will add to the competitive pressures facing Univision. However, Univision currently has incumbent advantage and dominant market presence. Fitch expects these factors, along with its pipeline of proven content from Televisa, to enable it to grow amid these increasing pressures.
Ratings concerns center on the highly leveraged capital structure, limited free cash flow (FCF) generation relative to total debt, as well as the company's significant exposure to advertising revenue. As of March 31, 2014, Fitch estimates total leverage and secured leverage of 9.8x and 7.9x, respectively (including the convertible note due to Televisa). Fitch expects deleveraging to be driven by EBITDA growth and modest levels of mandatory term loan amortization. Including the recent $117 million reduction in its 2022 senior secured notes, Fitch expects total leverage to be around 9x by year end 2014.
Fitch recognizes the event risk of an Aereo victory in the courts could weaken Univision's negotiating position with MVPDs over valuable retransmission consent revenues. The existence of Aereo's service or similar services as a viable alternative to gain access to local and network over the air television broadcasts would harden the MVPDs position and temper the anticipated growth rate of retransmission consent revenues, which broadcasters have become increasingly reliant upon. Ultimately, but unlikely in Fitch's view, MVPDs could elect not to enter a retransmission consent agreement with broadcasters and either implement their own Aereo like technology, or not carry the broadcast on their respective networks, placing the retransmission consent revenues in jeopardy. Fitch acknowledges that should the MVPDs pursue this strategy, changes to the retransmission consent model would evolve over a long period of time (current multi-year retransmission contracts would have to expire). Should such a downside scenario materialize, broadcast networks, including Univision could stop offering its content over the air and convert into a cable network. However converting from a broadcast network to a cable network will present challenges including anticipated political backlash, the precarious position of broadcast network television affiliates, and potential issues related to broadcast rights pertaining to sports leagues.
Liquidity and Debt
Fitch regards current liquidity as adequate, particularly in light of minimal near-term maturities. Following a series of refinancing transactions, UVN has significantly reduced near-term obligations. The company's next material maturity is the $1.2 billion in notes due 2019. At March 31, 2014, liquidity consisted of approximately $78 million of cash, approximately $503 million available under the $550 million RCF due 2018 (net of borrowings and letters of credit), and $280 million available under the $400 million AR securitization facility (consisting of $300 million revolver and $100 million term facility).
Fitch calculates 2013 FCF of negative $100 million and latest 12 month ended (LTM) March 2014 FCF of negative $31 million. The negative FCF have primarily been driven by increased programming investments. Fitch expects FCF in the range of $150 million to $250 million for 2014.
Fitch estimates at March 31, 2014, Univision had total debt of $10.5 billion, which consisted primarily of:
--$47 million in revolving credit facility due March 2018;
--$120 million in account receivable facility due June 2018;
--$4.6 billion in senior secured term loans due March 2020;
--$1.2 billion 6.875% senior secured notes due 2019;
--$750 million 7.875% senior secured notes due 2020;
--$1.1 billion 6.75% senior secured notes due 2022;
--$700 million 5.125% senior secured notes due 2023;
--$815 million 8.500% senior unsecured notes due 2021;
--$1.125 billion 1.5% subordinated convertible debentures issued to Televisa, due 2025. (This note is a direct obligation of the parent HoldCo, Broadcasting Media Partners, Inc., but is serviced by dividends paid by Univision.)
Univision's Recovery Ratings reflect Fitch's expectation that the enterprise value of the company, and thus, recovery rates for its creditors, will be maximized in a restructuring scenario (going concern), rather than a liquidation. Fitch employs a 7x distressed enterprise value multiple and estimates the adjusted distressed enterprise valuation in restructuring to be $6.4 billion. The 'B+' rating for the secured debt reflects Fitch's expectations for recovery in the 51% - 70% range. The 'CCC+' rating on the $815 million senior unsecured notes reflects Fitch's expectations for 0% recovery.
Positive ratings actions could occur if Univision delevers significantly from current levels, with indications that the company is on target to reach 7x-9x and 5x-6x total and secured leverage targets, respectively. Fitch expects deleveraging could occur largely through EBITDA growth, as well as modest debt reduction.
Negative ratings actions could occur if operating results and FCF are materially lower than Fitch's expectations. Fitch expects FCF of $150 to $250 million in 2014. This would be contradictory to Fitch's constructive view on the Spanish language broadcasting industry and Univision's positioning within it, and could indicate that the company is more susceptible to secular challenges than previously anticipated.
Fitch has affirmed Univisons's ratings as follows:
--Issuer Default Rating at 'B';
--Senior secured at 'B+/RR3';
--Senior unsecured at 'CCC+/RR6'.
Additional information is available at www.fitchratings.com. THE ISSUER DID NOT PARTICIPATE IN THE RATING PROCESS, OR PROVIDE ADDITIONAL INFORMATION, BEYOND THE ISSUER'S AVAILABLE PUBLIC DISCLOSURE.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage