NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+(EXP)' expected rating to the proposed issuance of benchmark sized 10-year and 30-year senior unsecured note offering by 21st Century Fox America, Inc., a subsidiary of Twenty-First Century Fox, Inc. (FOXA). The Rating Outlook is Stable.
FOXA had approximately $19.1 billion of debt outstanding as of Sept. 30, 2016, pro forma for October 2016 maturities, consisting primarily of senior unsecured notes issued by 21st Century Fox America, Inc. (some are issued under that entity's former name, News America Holdings, Inc.). A complete list of ratings follows at the end of this release.
Proceeds of the new issue are expected to be used for general corporate purposes. The new notes will rank pari-passu with other senior unsecured indebtedness of 21st Century Fox America, Inc. and will also benefit from a guarantee by FOXA. The notes will contain an obligation to repurchase the notes at 101% upon change of control (including a transfer of more than 50% of the company's voting stock to a person other than News Corp. or a member of the Murdoch family) and non-investment grade ratings, as defined. Similar to existing bonds, there are no financial covenants.
KEY RATING DRIVERS
--FOXA's portfolio of cable networks, including regional sports networks, and leading brands underpin the ratings. Fitch believes these businesses position the company with solid growth prospects and the ability to generate meaningful levels of free cash flow (FCF).
--Fitch expects that FOXA will use its excess liquidity to further reinvest in its core businesses and growth initiatives while supporting shareholder returns within the context of managing to its leverage target ranging between 2.5x and 3.0x.
--Shareholder returns (dividends and stock repurchases) that exceed FCF generation are incorporated into current ratings, to the extent that leverage remains below Fitch's 3x total leverage threshold.
--FOXA's liquidity position and financial flexibility remain strong for the rating. Fitch anticipates FOXA will generate annual FCF between $2.5 and $3.5 billion during the rating horizon.
--FOXA is well positioned to address the secular threats and opportunities presented by alternative digital distribution platforms and continued audience fragmentation across the media and entertainment landscape.
Fitch holds FOXA's overall strategic positioning in high regard as its businesses consist of a strong collection of cable and regional sports networks, leading television and film studios, national television network with robust sports-programming rights, and local television broadcast. Each of FOXA's businesses have the scale characteristics to operate at high margins and generate meaningful levels of free cash flow (FCF) and positions the company to address the secular threats and opportunities presented by changing media consumption patterns and continued audience fragmentation across the media and entertainment landscape. Fitch believes these businesses position the company with solid growth prospects and the ability to generate meaningful levels of FCF, and balanced against the risks inherent within the company's operating profile, place the company solidly within Fitch's parameters for a 'BBB+' rating.
FOXA's financial priorities remain consistent. The company's leverage target, ranging between 2.5x and 3.0x along with the FOXA's incremental $3 billion share repurchase program and dividend highlight its capital allocation policy. FOXA is capitalizing on the capacity and flexibility within its balance sheet and intends to remain disciplined with respect to share purchases during fiscal 2017.
Outside of potential merger and acquisition activity, Fitch expects that FOXA will continue investing in its core businesses and growth initiatives and support shareholder returns within the context of managing to its leverage target. Shareholder returns that exceed FCF generation are incorporated into current ratings, to the extent that leverage remains below Fitch's 3x total leverage threshold.
FOXA's capital structure and credit protection metrics remain stable and within Fitch's expectations for the current rating. Consolidated leverage as of the latest 12 months (LTM) period ended Sept. 30, 2016 was 2.81x. Fitch expects leverage will be near the top end of the company's 2.5x to 3.0x leverage target during the rating horizon.
Scheduled maturities are well-laddered and manageable considering the company's FCF, reliable market access and back-up liquidity. Upcoming maturities total $350 million due during fiscal 2018 (7.25% senior debentures due May 2018). FOXA repaid $400 million during the second quarter of fiscal 2017 (8.00% senior debentures due Oct. 2016).
FOXA is well positioned to address the secular threats and opportunities presented by emerging alternative distribution platforms and continued audience fragmentation across the media and entertainment landscape. The alternative distribution platforms generate incremental demand for high-quality content across all major end-markets (broadcast, cable networks and subscription video on demand) and large, well-capitalized content providers, such as FOXA, will remain crucial to the industry. The ratings incorporate expected earnings volatility generated by the company's Filmed Entertainment segment, given the general hit-driven nature of the movie industry.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
--The revenue growth within the company's cable network programming business reflects the company's ability to secure affiliate fee rate increases. Fitch anticipates low-double-digit affiliation fee growth. The company's investment in original programming and acquisition of sports rights support affiliate fee growth.
--From a margin perspective, the base case reflects the company's investment in original programming and costs associated with acquired programming. The ability to grow higher affiliate fee revenues at a similar pace to programming costs contribute to stable margins at the cable network programming segment.
--Fitch assumes typical volatility within the Filmed Entertainment business. The Television segment benefits from a stable economic and growing retransmission consent revenues while incorporating typical political advertising revenue cycle. Fitch assumes a slightly weaker television advertising environment as digital media continues to take share from traditional advertising revenues. Fitch expects political advertising to contribute to positive growth during the first half of fiscal 2017.
RATING SENSITIVITIES
Positive: Positive rating action would likely coincide with FOXA adopting a more conservative financial policy highlighted with a gross leverage target of 2x or lower. Meanwhile, FOXA will need to demonstrate that its operating profile can sustain itself amidst ongoing competitive pressures, changing media consumption patterns and evolving technology platforms.
Negative Rating Trigger: Negative rating actions are more likely to coincide with a material shift in financial policy including, but not limited to, the company adopting a more aggressive financial strategy or event-driven merger and acquisition activity that drive leverage beyond 3x in the absence of a credible deleveraging plan while exhausting excess cash balances. A negative rating action based solely on operational performance is unlikely over the short term.
LIQUIDITY
Fitch believes that FOXA's liquidity position and financial flexibility are strong for the rating given the strength of its businesses and expected FCF generation. The company's liquidity position is supported by existing cash balance totalling $4.7 billion as of Sept. 30, 2016 (approximately $1 billion held by foreign subsidiaries as of June 30, 2016) and the borrowing capacity from its $1.4 billion revolver which expires May 2020.
The company generated approximately $3.2 billion of Fitch-defined FCF for the LTM period ended Sept. 30, 2016. FCF generation remains strong even as the Company continues to invest in channel launches, original content, and higher costs to acquire programming (including sports programming) across the company's portfolio of cable and television networks. Fitch expects these investments will remain among the company's key priorities during its fiscal year 2017.
FULL LIST OF RATING ACTIONS
Fitch currently rates FOXA as follows:
Twenty-First Century Fox, Inc.
--Issuer Default Rating (IDR) 'BBB+'.
21st Century Fox America, Inc.
--IDR 'BBB+';
Date of Relevant Rating Committee: Jan. 21, 2016
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)
https://www.fitchratings.com/site/re/869362
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