CHICAGO--(BUSINESS WIRE)--Fitch Ratings expects to rate Radio e Televisao Bandeirantes Ltda's (BAND) proposed USD200 million senior unsecured notes 'BB-(EXP)'. Fitch has also assigned long-term foreign currency and local currency Issuer Default Ratings (IDRs) of 'BB-' and national long-term rating of 'A(bra)' to BAND. The Rating Outlook on the IDRs and the national long-term rating is Stable.
BAND is a part of Grupo Bandeirantes de Comunicacao (Grupo Banderiantes), a diversified media group in Brazil, and is one of the group's major free-to-air (FTA) TV and radio broadcasters. The ratings are based on the combined credit profile of Grupo Bandeirantes given the centralized group cash management, and a strong operational linkage among the group companies under the common executives and the control by the major shareholder.
The proposed notes will be guaranteed by only five other major TV and radio group entities, on a joint and several basis, and as such, noteholders' access to non-guarantors' cash generation could be potentially limited due to a lack of legal support. The issuer and the guarantors together represented 78% and 60% of the consolidated group revenues and EBITDA, respectively, in 2013.
The proceeds of the notes will be primarily used for refinancing of the short-term debt, amounted to BRL457 million at end-2013, and for general corporate purposes, including improving liquidity. Therefore, the impact on BAND's net debt from the proposed issue will not be material.
KEY RATING DRIVERS:
BAND's ratings reflect Grupo Bandeirantes' diversified media portfolio with a nationwide presence in Brazil, the company's stable growth outlook above the national GDP rates, and Fitch's expectation of the company's margin improvement. The analysis also factored in the company's moderate leverage for the rating category, as well as the extended debt maturities post the note issuance.
Ratings are tempered by the company's weak market position in its main TV business and a small scale of operations compared to regional peers, a highly competitive operating environment, and increasing competition from other media platforms. Grupo Bandeirantes' corporate governance was also considered below the average for the rating category.
Diversified Media Portfolio:
Grupo Bandeirantes is one of the largest and most diversified media groups with a national presence in Brazil. The group's main businesses are FTA television and radio broadcasting which combined represented close to 90% of the group's net revenues in 2013. The group also produces newspapers, pay TV programming, media solution in public transportation in its 'out-of-home (OOH)' segment, as well as internet portal website.
Grupo Bandeirantes boasts a strong operational integration across its various media platforms due to the sharing of production infrastructure and talents, as well as the distribution of contents under the common management. This helps the group maintain the quality of contents across the segments with an efficient cost structure.
Weak Market Position in TV:
Fitch expects the competitive landscape in Brazil to remain intense which could limit any significant market share improvement of the company on its FTA TV business. Grupo Bandeirantes is the fourth largest TV operator in a highly competitive industry in Brazil, where the market is dominated by Globo with an over 40% market share. The company accounted for a revenue market share of about 6% in 2013, which improved from 4% in 2007. For its radio operation, the company is the largest broadcaster with over 20% market share in Sao Paulo.
Positive Industry Outlook:
Fitch believes that the advertising market in Brazil will continue a stable growth over the medium term in line with the increased disposable income level, despite a slowdown in the country's GDP growth. In 2013, the media market grew by about 7% to BRL32.2 billion in 2013 from BRL30.2 billion in 2012, and the FTA TV segment accounted for 67% of the industry revenue, which was an increase from 65% in 2012. Fitch expects the FTA TV will remain the dominant advertisement platform, despite the increasing internet market share, given its position as the main media in Brazil and advertisers' strong preference for TV over the others.
In addition, revenue contributions from other segments, mainly the OOH segment, are likely to gradually increase given the still low penetration of this service in Brazil. Fitch forecasts this segment's revenue proportion will rise above 10% in the medium term from only about 5% in 2013. Also, revenues from Rede 21, Grupo Bandeirantes's other FTA channel in Sao Paulo, will increase in 2014 given the new sales contracts to a third party last year.
Negative FCF in 2014; Moderate Leverage:
Fitch forecasts the group to generate negative free cash flow (FCF) in 2014 mainly due to capex of near BRL100 million, mainly including expansion of the OOH segment. FCF is likely to turn positive in the medium term as Fitch expects its EBITDA generation to improve well above BRL250 million while the expansionary capex falls towards BRL60 million from 2016, leading to a decline in the net leverage ratio towards 2x from 3x at end-2013. Any material debt reduction is unlikely over the medium term given the long debt maturities.
BAND holds most of the group debt as it had access to the capital market on behalf of the group historically and redistributed a portion of the debt, in the form of intercompany loans, to support other group companies' business. BAND held BRL680 million debt at end-2013 and its net leverage ratio on a standalone basis was 4.7x. Fitch believes that BAND's leverage is likely to improve and remain below 4x over the medium term as EBITDA improves, as already shown in the company's first quarter of 2014 result. In addition, the company will gradually collect the intercompany loans from the affiliates while any further intercompany loans will be largely restricted by the covenant of the notes going forward. Fitch does not believe the other group companies will need any significant external financing to support their operation.
Extended Debt Maturities:
Grupo Bandeirantes's liquidity profile is weak as almost 60% of its total debt, about BRL457 million, will mature in 2014 and the group held only BRL160 million cash and short-term investments at end-2013. Fitch expects the company to significantly extend the debt maturities profile with the proceeds from the proposed note of USD200 million. Post the note issuance, the company will not face any significant maturity until 2021.
Negative rating action can be considered if the financial net leverage of Grupo Bandeirantes, including BAND, substantially increases due to competitive pressures. In addition, an increase in the debt level of non-guarantors resulting in weaker access of BAND to non-guarantors' cash generation could pressure the ratings.
The ratings reflect the extended debt maturities with the proceeds from the notes issue. Failure to improve the liquidity profile can also lead to a negative rating action.
Positive rating action can be considered in case of the improved legal support from the non-guarantors of Grupo Bandeirantes for the proposed note. Also, a significant improvement in cash generation at both BAND and the group level resulting in improved net leverage on a sustained basis could be positive for the ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', May 28, 2014.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage