Fitch Affirms Globo's Ratings at 'BBB'; Outlook Negative

CHICAGO--()--Fitch Ratings has affirmed the following ratings for Globo Comunicacao e Participacoes S.A. (Globo):

--Foreign currency Issuer Default Rating (IDR) at 'BBB'; Outlook Negative;

--Local currency IDR at 'BBB+'; Outlook Stable;

--National scale long-term rating at 'AAA(bra)'; Outlook Stable.

Fitch has also affirmed the ratings for the following senior unsecured notes:

--USD325 million senior unsecured notes due 2025 at 'BBB';

--USD200 million senior unsecured notes due 2022 at 'BBB';

--USD300 million senior unsecured notes due 2022 at 'BBB'.

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. The ratings also reflect the company's stable operating margins and strong cash flow generation which enable robust financial profile with zero leverage (positive net cash).

KEY RATING DRIVERS

Strong Business Profile

Globo is the largest broadcaster and pay-TV programming provider in Brazil with about 37% of the national audience share. Globo's dominant market position stems from its business strategy, heavily focused on quality content production which has enabled it to garner the largest advertising revenue share in the industry. As the company continues to invest in strong content production, Fitch believes that 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.

Weak Industry Trend

A subdued economic environment in Brazil has negatively affected the advertising demand in Brazil, which translated to negative revenue growth for Globo during the first half of 2015. Weak market condition has limited Globo's ability to aggressively raise prices and the company's revenues and EBITDA generation fell by 9% and 21%, respectively, during the period compared to a year ago. Fitch retains a conservative view on the sector in 2016 as any meaningful demand recovery would be difficult to materialize under the tough economic condition in the country. As such, Globo's EBITDA margin is forecast to remain suppressed at 24% - 25% in 2015 and 2016, which compares to 28% in 2014.

Positive Diversification

Rapid increase in pay-TV penetrations bodes 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 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 32% of total revenues in the first half of 2015, 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 weak advertising revenue growth.

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. Despite weaker performance, Fitch forecasts the company to continue its positive free cash flow (FCF) generation in the short to medium term in the absence of any sizable dividend payments, which should help maintain its large net cash position. During the last 12 months (LTM) ended June 2015, the company's CFFO amounted to BRL2.9 billion which comfortably covered capex of BRL685 million. Dividend payments amounted to BRL2.8 billion during the period but this mainly due to a special dividend payment during 2014, which Fitch does not expect to recur in the short to medium term.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Globo include:

--Negative revenue growth in 2015, followed by a low-to-mid single digit revenue growth in 2016 due to weak advertising demand;

--EBITDA margins to remain suppressed in the range of 24%-25% in 2015 and 2016;

--Capex-to-sales ratio to remain at around 4.5% in 2015 and 2016 due to investments for production facility;

--FCF generation to turn positive in 2015 in the absence of sizable special dividend payments;

--Net leverage to remain zero (positive net cash) over the medium to long term.

RATING SENSITIVITIES

Fitch does not foresee any material deterioration in the company's credit profile over the medium term given its strong business position and robust cash flow generation.

Factors that could potentially lead to a negative rating action are

--Material profitability erosion driven by regulatory/competitive pressures;

--A significant drop in Globo's viewership market share due to a lack of attractive content;

--Deterioration in its over-the-air TV's advertising revenue market share due to increasing competitiveness of internet and pay-TV;

--Sizable acquisitions and/or aggressive shareholder distributions resulting in suppressed cash generation and increased leverage.

Also, a further negative rating action on Brazil's sovereign ratings and country ceiling could 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 has robust liquidity as its readily-available-cash balance, amounted to BRL6.9 billion, fully covered total debt of BRL2.8 billion as of June 2015. The company's debt maturities are well spread with an insignificant short-term debt of BRL47 million in the same period. Globo does not face any sizable bullet maturity until 2022 when USD500 million of senior notes become due.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=994419

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=994419

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Alvin Lim, CFA
Director
+1-312-368-3114
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Mauro Storino
Senior Director
+55 21 4503 2625
or
Committee Chairperson
Ricardo Carvalho
Senior Director
+55 21 4503 2627
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alvin Lim, CFA
Director
+1-312-368-3114
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Mauro Storino
Senior Director
+55 21 4503 2625
or
Committee Chairperson
Ricardo Carvalho
Senior Director
+55 21 4503 2627
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com