NEW YORK--(BUSINESS WIRE)--(This is a correction of a release issued earlier today. It clarifies the prior rating for Discovery's senior unsecured debt, which was stated incorrectly in the ratings list of the original release.)
Fitch Ratings has downgraded the Issuer Default Rating (IDR) of Discovery Communications LLC (Discovery) to 'BBB-' from 'BBB'. Fitch has also downgraded the short-term IDR to 'F3' from 'F2'. The Rating Outlook is Stable.
The rating action follows the company's announcement that it is increasing its gross target leverage range to 3.25x - 3.4x. The target leverage range is being increased as part of Discovery's ongoing efforts to return capital to shareholders while continuing to make opportunistic acquisitions. To that end the company announced a $2 billion increase to its share repurchase authorization, with more than $1.1 billion planned for the next 12 months.
A complete list of ratings is provided at the end of this release.
KEY RATING DRIVERS
The rating action is driven by Discovery's adoption of a more aggressive financial policy, highlighted by the increased target leverage, which is outside tolerance established for a 'BBB' IDR. Fitch anticipates that Discovery will generate between $1.3 billion and $1.4 billion of free cash flow (FCF) annually. In conjunction with the FCF, the company plans to issue additional debt to fund the repurchases and any potential acquisitions.
Discovery's ratings are supported by the company's strong core brands, particularly the Discovery and TLC brands, both of which reach nearly 100 million subscribers across the U.S. In addition, the ratings incorporate the revenue and growth prospects of the company's international business segment, global carriage, leverageable content, robust FCF and solid credit metrics at the 'BBB-' IDR. Ratings concerns center on the significant contribution of cyclical advertising revenue relative to peers, a competitive landscape for similar programming, volatility associated with hit-driven content and the company's dependence on the Discovery and TLC brands.
Fitch believes Discovery's credit profile has sufficient flexibility to accommodate share repurchase activity at the new rating level. Debt incurrence to fund share repurchase activity is incorporated into ratings up to the company's 3.5x maximum leverage threshold, which is well within the range for Discovery's 'BBB-' rating.
Discovery's solid FCF generation, strong credit protection metrics and minimal near-term scheduled maturities afford the company considerable financial flexibility at the new rating level. Fitch anticipates that Discovery is positioned to generate annual FCF of $1.3billion to $1.4 billion, given the company's high operating margins, global distribution platform and low capital intensity associated with the cable programming business.
Fitch's key assumptions within the rating case for Discovery include:
--Low to mid-single digit top line growth;
--Margin declines driven by increased exposure to lower margin International properties;
--Annual FCF generation of approximately $1.3 billion to $1.4 billion;
--Debt issuance to fund expected aggregate share buybacks and M&A activity in excess of annual FCF generation.
An upgrade is unlikely over the medium term, given the company's stated willingness to operate at the top end of its leverage target and the limited depth of brands. Factors considered for an upgrade include an explicit commitment from management and a compelling rationale for Discovery to operate at a more conservative leverage metric and material viewership on new channel launches that will drive increased advertising and affiliate fees and enhance revenue diversity.
Negative ratings pressure could result from a more aggressive financial policy with leverage exceeding Fitch's 4.0x threshold for the rating in the absence of a credible plan to return leverage below the threshold. Ratings pressure could also result from meaningful customer defections to free viewing platforms leading to revenue declines or significant margin and FCF pressure from higher programming costs.
As of Sept. 30, 2015, the company had solid liquidity consisting of $262 million in cash, and $1.42 billion of availability under its $1.5 billion revolving credit facility due 2019. Discovery's liquidity position and overall financial flexibility is supported by FCF, which amounted to approximately $1.08 billion for the LTM period ended Sept. 30, 2015. Fitch expects pro forma FCF to range from $1.3 billion to $1.4 billion during the ratings horizon
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following ratings:
Discovery Communications LLC
--Long-term IDR to 'BBB-' from 'BBB';
--Short-term IDR to 'F3' from 'F2';
--Senior unsecured revolving credit facility to 'BBB-' from 'BBB';
--Senior unsecured notes to 'BBB-' from 'BBB';
--Commercial paper to 'F3' from 'F2'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: Nov. 3, 2015
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Dodd-Frank Rating Information Disclosure Form