CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Radio e Televisao Bandeirantes Ltda.'s (RTB) Long-Term Foreign Currency and Local Currency Issuer Default Ratings (IDR) at 'BB-'. Fitch has also affirmed the company's National Long-Term Rating at 'A(bra)'. The Rating Outlook is revised to Negative from Stable.
The Outlook revision to Negative reflects Brazil's tough operational outlook under subdued macroeconomic conditions, which continues to pressure the country's advertising industry. RTB's weak capital structure and liquidity profile and its high financing costs are also factors. A downgrade to the 'B' category could occur if EBITDA contracts due to pressured revenue growth and if the company fails to materially improve its debt maturity profile before the end of 2016.
KEY RATING DRIVERS
RTB is part of Grupo Bandeirantes de Comunicacao (BAND), a diversified media group and one of the group's major free-to-air (FTA) TV and radio broadcasters in Brazil. RTB's ratings are based on the combined credit profile of BAND given the centralized group's cash management and a strong operational linkage among the group's companies under shared executives and control by the same major shareholder.
The ratings reflect BAND's diversified media business with a nationwide presence in Brazil, its historical stable performance backed by continued cost savings initiatives that enabled positive FCF generation since 2014, and moderately low leverage for the rating category.
The ratings are tempered by BAND's weak market position in its main TV business and a small operational scale compared to regional peers amid tough economic conditions and a high level of competition. The company's liquidity and its access to credit, reflected by its high financing cost and a predominantly secured-debt-based debt profile, are key credit weakness. Also, the company's corporate governance, with its complex group structure, is also considered below average for the rating category.
Unfavorable Operational Environment:
Media companies continue to experience weaker demand for advertising due to unfavorable macro-economic environment in Brazil and waning importance of free-to-air TV (FTA) due to pay-TV and internet advertisement growth. Weak market conditions will continue to impede any material advertising price improvements as advertisers' budgets are expected to remain constrained, which could pressure BAND's FTA operation. Attractive content remains a key competitive factor, thus any significant reduction in production costs could be challenging, resulting in suppressed operating margins of the FTA advertising segment.
FTA's industry revenues declined for the first time in more than a decade to BRL22.9 billion in 2015 after reaching a record BRL23.2 billion in 2014, and Fitch forecasts the difficult trend to continue in the short term. BAND's total revenues, excluding its Printed Media segment, were negatively affected in 2015, declining by 6% to BRL1.343 billion from BRL1.421 billion in 2014. EBITDA margin is likely to remain pressured in 2016 due to high amortization costs from major sport events such as the Olympic Games.
Weak Liquidity:
BAND's liquidity profile is considered weak for the rating category given its high proportion of short-term debt. As of Dec. 31, 2015, the company's short-term debt was BRL428 million accounting for 47% of total debt, which improved from 67% as of December 2014, largely due to its issuance of BRL250 million debentures in late 2015. During this period, the company's readily available cash totaled BRL198 million. Fitch expects the company to continue to gradually reduce its short-term debt in 2016, backed by a combination of its positive FCF generation and cash balance, as well as extension of debt maturities.
Weak TV Market Position:
BAND is the fourth largest TV operator in a highly concentrated industry in Brazil where the market is dominated by Globo with about 36% audience share in 2015. BAND accounted for a TV audience market share of 4.3% in 2015, which is a modest improvement from 4% in 2007. Fitch expects the competitive landscape to remain intense, which could limit any future market share improvement. BAND's main contents are news, sports, and entertainment.
Moderately Low Leverage:
Fitch expects BAND's positive FCF generation to continue in the medium term, backed by its lower capex and working capital requirements, resulting in modestly improved leverage. Fitch forecasts the company's net leverage to continue to stay at around 2.5x in 2016, which is in line with the 2015 level of 2.7x and is considered moderately low for the rating category, despite projected EBITDA contraction due to unfavorable market condition. This level of leverage compares favorably to its historical level of 4.1x at end-2013.
Diversified Media Portfolio
BAND is a diversified media group with a national presence in Brazil. The group's main business is free-to-air (FTA) television and radio broadcasting which combined represented close to 70% of the group revenues in 2015. BAND also produces free newspapers, pay-TV programming, media solution in public transportation in its 'out-of-home (OOH)' segment and to a smaller extent its internet portal website.
BAND boasts strong operational integration across its various media platforms backed by the sharing of production infrastructure and talents, as well as the distribution of content under the common management. This helps the group maintain quality of content across the segments with an efficient cost structure.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for RTB include:
--Slower growth of the advertisement industry in Brazil in the short to medium term due to subdued GDP growth;
--BAND viewership market share to remain stable over the medium term;
--Capex to sales ratio of 2.5% over the medium term;
--BAND to successfully meet its debt maturities in 2016;
--Net Leverage to remain at around 2.5x in 2016
RATING SENSITIVITIES
Negative rating action could be considered in case of material EBITDA contraction due to the tough operating environment leading to increased leverage and tepid FCF generation. In addition, the company's failure to materially improve its short-term debt profile within 2016 would immediately pressure the ratings toward the 'B' category. Failure to reach 1.2x of readily available cash plus cash flow from operations/short-term debt would also be negative for the ratings.
Positive rating action is unlikely in the short to medium term given unfavorable economic conditions in Brazil negatively affecting FTA advertising trends. The Rating Outlook could be revised to Stable if the company continues to generate solid positive FCF generation on a sustained basis, leading to continued reduction in its gross debt level and a well-distributed debt maturities profile.
LIQUIDITY
BAND's liquidity profile is weak as its short-term debt amounted to BRL428 million as of Dec. 31, 2015, which unfavorably compares to its cash balance of just BRL198 million during the same period. Fitch believes the company has made and will continue to make progress to cope with its short-term debt maturity concentration through its liability management initiatives, coupled with internal cash flow generation and the outstanding cash balance.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Radio e Televisao Bandeirantes Ltda.
--Long-Term Foreign Currency IDR at 'BB-';
--Long-Term Local Currency IDR at 'BB-';
--National Long-Term Rating at 'A(bra)'.
The Rating Outlook is revised to Negative from Stable.
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
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008050
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