CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded Radio e Televisao Bandeirantes Ltda.'s (RTB) long-term foreign-currency and local-currency Issuer Default ratings (IDR) to 'B' from 'BB-'. Fitch has also downgraded the company's National Long-term Rating to 'BBB-(bra)' from 'A(bra)'. The Rating Outlook remains Negative.
KEY RATING DRIVERS
The downgrade reflects RTB's continued weak liquidity profile, mainly its high level of short-term debt with low cash balance and high interest expenses. The company's revenue and EBITDA generation have also deteriorated compared to 2015 levels under tough economic conditions that have dampened advertising demand in Brazil.
The Negative Outlook reflects Fitch's view that any material recovery in the operational outlook would be difficult and that this would limit FCF generation and liquidity profile improvement. A further downgrade could occur unless RTB improves its debt maturities profile within the next few quarters and materially turns around its operational cash flow generation.
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 Band's combined credit profile 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.
Weak Liquidity:
Band's liquidity profile is weak given its high proportion of short-term debt and low cash position. Despite successful refinancing of some of its short-term debt maturities during 2016, the company's short-term debt was still high at BRL301 million, which represented 37% of its total debt as of Sept. 30, 2016. The company's readily available cash balance during the period was just BRL59 million, while it also kept BRL30 million in the escrow account related with the debentures. Fitch expects Band to continue to face limited financial flexibility as its short-term debt matures, which would require ongoing negotiation for credit extension at high interest expenses.
Band's ability to successfully execute its cost savings initiatives while ensuring content attractiveness will be key in improving its profitability and cash flow generation to comfortably cover its high finance expenses and gradually reduce short-term debt. The company's adjusted net leverage, which was 3.0x as of September 2016, is considered relatively low for the rating level, but the benefit is fully diluted given its poor liquidity condition.
Unfavourable Industry Trend:
Media companies continue to experience weak demand for advertising due to unfavourable 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 remain constrained, which could pressure Band's FTA operations. Fitch does not foresee any material recovery in the advertising demand in the near term given current weak macro environment in Brazil. FTA's industry revenues declined for the first time in more than a decade to BRL22.1 billion in 2015 after reaching a record BRL23.2 billion in 2014.
Weak TV Market Position:
Band's market position is weak, and Fitch does not foresee any material improvement in the company's market share given intense competitive landscape. The company is the fourth-largest TV operator in a highly concentrated industry in Brazil, where the market is dominated by Globo Participacoes S.A. Band's TV audience market share was 4.3% in 2015, a modest improvement from 4% in 2007.
Diversified Media Portfolio:
Band is a nationwide diversified media group in Brazil. Its main business is FTA television and radio, which combined represented close to 70% of revenue in 2015. Band boasts strong operational integration across various media platforms backed by the sharing of production infrastructure and talent, 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.
DERIVATION SUMMARY
Band's business profile, in terms of weak market position in its main TV business and a small operational scale, is materially weaker than its regional peers in the investment grade categories. The company's leverage is low for the 'B' category, but this is offset by its weak liquidity profile and access to credit, given high short-term debt reliance and financing cost, as well as a predominantly collateralized debt profile. Also, the company's corporate governance, with its complex group structure, is considered weak, in line with the rating level. No country-ceiling, parent/subsidiary or operating environment aspects impact the rating.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for RTB include:
--Continued successful rollover of its short-term debt;
--Negative revenue growth due to the weak advertisement industry in Brazil in the short to medium term;
--Modestly improved EBITDA margins based on cost savings initiatives in 2017 and 2018;
--Net leverage to remain at around 3.0x in the short to medium term.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to negative rating action:
--No material short-term debt reduction and low cash balance, resulting in continued weak financial flexibility;
--Continued EBITDA contraction with negative FCF generation;
--Failure to reach 1.0x of readily-available cash plus cash flow from operations / short-term debt.
Positive rating action is unlikely in the short to medium term, given the company's weak capital structure amid the tough operational outlook in Brazil.
LIQUIDITY
RTB's liquidity profile is weak, which is the key rating driver. The company's short-term debt amounted to BRL301 million, while its readily-available cash balance was just BRL59 million as of Sept. 30, 2016 while it also kept BRL30 million in the escrow account related with the debentures. The company has a high short-term debt reliance, which represented 37% of its total debt during the same period.
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following ratings:
Radio e Televisao Bandeirantes Ltda.
--Long-term foreign-currency and local-currency IDRs to 'B' from 'BB-'; Outlook Negative;
--National Long-term Rating to 'BBB-(bra)' from 'A(bra)'; Outlook Negative.
Additional information is available on www.fitchratings.com
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016049
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https://www.fitchratings.com/regulatory
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