CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+(EXP)' rating to Globo Comunicacao e Participacoes S.A.'s (Globo) proposed USD325 million senior unsecured notes due 2025.
The proposed senior unsecured notes will be a reopening of Globo's USD325 million step-up perpetual notes issued in 2010 and will not represent any cash inflow to the company. Through a structured transaction, the perpetual notes issued in 2010 will be purchased, amended and replaced into the proposed senior unsecured notes.
Globo will transfer the call option of all of the outstanding step-up perpetual notes issued in 2010 to Pontis III Ltd. (Pontis III), a Cayman Islands company unrelated to Globo. Pontis III will issue USD325 million senior exchangeable notes (SENs) in order to fund this acquisition. Subsequently, the SENs will be mandatorily exchangeable for Globo's USD325 million amended senior unsecured notes due 2025.
KEY RATING DRIVERS
Globo's ratings reflect its strong business profile as the largest broadcaster and pay-TV programming provider in Brazil supported by its strong content production. They also reflect the company's stable operating margins and strong cash flow generation which enable robust financial profile with zero leverage (positive net cash).
Strong Business Profile:
Globo is the largest broadcaster and pay-TV programming provider in Brazil with about 40% of the national audience share. Globo's business strategy is focused on quality content production, which has enabled it to garner the largest advertising revenue share in the industry over the years. As high investments towards strong content production continues, Fitch believes the company's market leadership will remain intact over the medium term. Globo has extensive TV station networks in Brazil, through its five wholly owned TV stations (five broadcast channels), and its 118 affiliates that jointly cover approximately 99% of Brazilian households with TVs.
Favorable Industry Trend:
Advertisement industry in Brazil is one of the largest globally and continues to grow strongly, far outpacing the growth of the domestic economy. The industry is estimated to have reached BRL33.5 billion in 2014, which compares to BRL22 billion in 2009. TV accounts for the largest portion, about 75% including pay-TV, of total advertising revenues, reflecting TV viewing as one of the major leisure activities in the country. Under this favorable environment, Globo's annual revenues have grown at an average rate of 11% during 2010-2014. Slowing Brazil economy could be potentially negative over the medium term; however, any signs of subdued growth of the advertising industry has yet to be seen.
Positive Diversification:
Rapid increase in pay-TV penetrations also bode well for Globo's growth over the medium to long term given its significant exposure to the platform as the largest programming provider; Globo has over 49 pay-TV channels, including eight of the 20 most watched channels in Brazil. The company benefits from a growing revenue contribution from its content/programming sales as it represented about 34% of total revenues in the first quarter of 2015 (1Q15), which favorably compares to only 15% in 2008. This positive diversification of cash generation will help the company cope with the competitive pressures stemming from the industry maturity amid a weak economy in Brazil.
Strong Financial Profile:
Globo boasts one of the strongest financial profiles among the diversified media companies in the region, backed by its robust cash flow generation and a high net cash position. During the last 12 months (LTM) ended March 2015, the company's CFFO amounted to BRL2.9 billion which comfortably covered capex of BRL694 million. Dividend payments amounted to BRL2.8 billion during the period, which was high compared to the previous years, mainly due to a special dividend payment during 2014. In the absence of sizable special dividends, Fitch expects the company to resume stable positive free cash flow (FCF) generation from 2015.
Globo generates stable operating margins, which have remained in around 25% in recent years, reflecting its strong position as the most attractive advertisement platform. The EBITDA margin improved to 27% in the LTM March 2015 and its net debt to EBITDA was negative 1.1x in the same period.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Globo include:
--Mid to high-single-digits revenue growth in the short to medium term;
--EBITDA margins to remain stable in the range of 25%-27% in 2015 and 2016;
--Positive FCF generation from 2015 in the absence of sizable special dividend payments;
--Net leverage to remain zero (positive net cash) over the medium term.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include:
Fitch does not foresee any negative rating action on Globo driven by operational deterioration given its solid market position and the projected robust cash generation in the short to medium term, despite slow to declining Brazilian GDP growth.
Negative factors that could pressure the ratings include:
Material profitability erosion driven by regulatory/competitive pressures, a significant drop in Globo's viewership market share due to a lack of attractive content, deteriorating over-the-air TV's advertising revenue market share due to increasing competitiveness of internet and pay-TV, and sizable acquisitions and/or aggressive shareholder distributions resulting in suppressed cash generation and increased leverage.
Negative rating action on Brazil's sovereign ratings and country ceiling could also result in negative rating action for the company's foreign currency IDR and debt ratings.
Conversely, positive rating actions are limited by Brazil's country ceiling of 'BBB+' and the industry's inherent risk profile.
LIQUIDITY
Globo's liquidity profile is strong as its readily-available-cash balance, amounted to BRL7.4 billion, fully covered total debt of BRL2.9 billion as of March 2015. The company's debt maturities are well spread with an insignificant short-term debt of BRL74 million in the same period.
Date of Relevant Committee: Nov. 19, 2014.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
National Scale Ratings Criteria (pub. 30 Oct 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985707
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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