NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to Scripps Networks Interactive, Inc.'s (SNI) new two-year $250 million senior unsecured term loan. Proceeds from the term loan are expected to be used to tender for the remaining non-controlling interest (44%) in Polish television operator, TVN and for general corporate purposes. The Rating Outlook is Negative. See the full list of ratings at the end of this press release.
Terms are similar to those of the revolving credit facility, including, among other things: a maximum consolidated leverage ratio of 4.5x; a limitation on liens (subject to certain exceptions) of up to 15% of total shareholder's equity; the ability to merge or sell all or substantially all of SNI's assets subject to certain exceptions; and the ability to enter into sale and lease back transactions. Prepayments are permitted, at SNI's discretion, in amounts no less than $10 million (in $1 million increments).
Fitch notes the incremental debt related to SNI's decision to tender for 100% of TVN is in line with the expectations for the current ratings. The Negative Outlook reflects the elevated leverage related to SNI's acquisition of 100% of Polish television operator TVN for EUR584 million in cash plus the assumption of EUR840 million of debt. Fitch calculates pro forma gross leverage at 2.8x, which exceeds Fitch's threshold of 2.5x for the assigned rating. However, Fitch expects SNI to focus on de-levering below 2.5x within 12-18 months.
KEY RATING DRIVERS
--SNI's portfolio of cable networks and leading home and lifestyle programming brands provide the foundation of the ratings.
--Acquisition of TVN is in line with the company's international expansion strategy. SNI's financial priorities remain consistent and focused on internal investment and international expansion. However, the acquisition limits the company's flexibility within the assigned ratings to accommodate operational missteps and share repurchases.
--Fitch expects SNI to focus on paying down debt following the acquisition of TVN and de-levering to a range of 2.0x-2.5x. Pro forma for the TVN acquisition, Fitch calculates SNI's gross leverage at 2.8x, which exceeds Fitch's threshold of 2.5x for the assigned rating. Fitch anticipates SNI will generate in excess of $400 million of annual free cash flow (FCF) which could facilitate expected debt reduction. Note however that Fitch does not expect the company to increase leverage to facilitate a more aggressive shareholder-return policy.
--SNI's reliance on advertising revenues is among the highest within the sector and, in Fitch's opinion, elevates the operating risks inherent in the company's operating profile.
SNI's portfolio of cable networks - in particular the company's HGTV, Food Network and Travel channel brands, each of which reach nearly 100 million subscribers throughout the U.S. - are the foundation of SNI's ratings. SNI's operating profile benefits from the stable, recurring, dual-stream revenue profile, high operating margins and FCF generation characteristics attributable to its cable network businesses. A level of ratings volatility at any given network is also factored into the credit ratings.
SNI's capital allocation strategy is centered on investing in original programming and production, international expansion, maintaining a strong balance sheet and returning excess capital to its shareholders. Fitch expects that SNI will continue investing in its core businesses and international growth initiatives while supporting shareholder returns within the context of reducing leverage to a range of 2.0x-2.5x. The company's shareholder returns (dividends and share repurchases) amounted to approximately $1.4 billion during the LTM period ended March 31, 2015. During February 2015, the board authorized an additional $1 billion under SNI's share repurchase program. Approximately $1.2 billion of capacity remains available under the company's share repurchase program.
SNI generated approximately $480 million of FCF during the LTM period ended March 31, 2015, as higher programming and production costs, cash taxes and dividends paid to non-controlling interests weighed on FCF generation. FCF generation generally affords the company significant financial flexibility.
Fitch anticipates that investments in original programming and international expansion will remain key strategies during 2015. Notwithstanding the pressures on FCF generation, SNI's FCF metrics remain strong relative to its peer group. Fitch expects the company to generate FCF margins in excess of 15% this year.
--Advertising revenues are expected to grow in the mid-single digits while affiliate fee revenue is projected to grow between 4% and 5% during the forecast period;
--Assumes minor margin pressure reflecting increasing programming and production costs due to higher investment in original programming. However, the model assumes that SNI's ongoing cost reduction efforts will largely offset programming and production cost pressure;
--2016 maturities are refinanced; FCF and cash are prioritized to pay down debt;
--No material acquisitions in 2016-2018.
What Could Lead to a Positive Rating Action:
--Given the Negative Outlook, Fitch does not expect a positive rating action during the rating horizon. The Outlook could be stabilized as the company demonstrates progress in reducing leverage to below 2.5x within the next 12-18 months.
What Could Lead to a Negative Rating Action:
--Negative rating actions are more likely to coincide with either discretionary actions of SNI management, including adopting a more aggressive financial strategy, or the inability to delever below 2.5x within 12-18 months following the TVN acquisition.
--Other negative triggers include execution risks and capital requirements related to the company's ongoing international expansion efforts having a negative impact on the company's operating profile.
LIQUIDITY AND DEBT STRUCTURE
Fitch believes that SNI's liquidity position and financial flexibility are adequate for the rating given the strength of its businesses, expected FCF generation, and access to capital markets. The company's liquidity position is supported by the borrowing capacity from its $900 million revolver, which expires during March 2020. SNI's maturity schedule is manageable with $500 million due in 2016 (December).
Fitch rates SNI as follows:
--IDR rated 'BBB+';
--Senior unsecured revolver rated 'BBB+';
--Senior unsecured term loan rated 'BBB';
--Senior unsecured notes rated 'BBB+'.
Date of Relevant Rating Committee: April 28, 2015
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)