NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Univision Communications Inc.'s (UVN) Issuer Default Rating (IDR) at 'B'. Fitch has also affirmed UVN's senior unsecured rating at 'CCC+/RR6' and upgraded its senior secured rating to 'BB-/RR2'. The upgrade is based on Fitch's expectations of improved recovery prospects supported by Univision's EBITDA expansion.
The Rating Outlook is Stable. A full list of rating actions follows at the end of this release. As of June 30, 2016, Univision had approximately $9.1 billion of debt outstanding.
Fitch recognizes UVN's improved credit profile supported by continued EBITDA growth; Grupo Televisa, S.A.B.'s (Televisa) conversion of $1.125 billion of subordinated debentures to warrants for the company's common stock; and UVN's refinancing activities, which have reduced its average cost of debt. Fitch also views positively UVN's redemption of $415 million of the 8.5% senior notes in the first half of 2016, which was funded with cash and revolver borrowings and resulted in total debt being reduced by roughly $300 million.
Two events could result in further deleveraging. First, in July 2015 UVN filed an S-1 for a planned IPO. The IPO continues to be delayed due to weak market conditions, and Fitch expects execution is unlikely in 2016. Market expectations released last year suggested the company could raise more than $1 billion, with planned proceeds to be used for debt repayment per the S-1. Second, UVN has filed an application to participate in the Broadcast Spectrum Incentive Auction (BSIA). Fitch believes UVN could generate significant proceeds from the BSIA. Fitch will revisit the rating once final net IPO and BSIA proceeds and resultant debt repayment amounts are finalized. Fitch views any significant debt repayment with IPO or BSIA proceeds as a positive for the company's credit profile and would consider an upgrade if total leverage falls below 6.0x. Neither deleveraging event is necessary for UVN to maintain its current ratings.
Fitch believes UVN's 'B' rating is accurate relative to its peers given the risks overhanging the credit including its private equity owners. In addition, recent softness in top-line growth could continue to delay UVN's IPO, which hampers its deleveraging efforts.
The ratings reflect UVN's dominant market position in Hispanic media, the still attractive demographic profile of the Hispanic population, and Fitch's expectations that advertisers will continue to grow advertising spend towards Hispanics. Fitch expects that increased competition in the Hispanic media segment could slow UVN's core television advertising growth. However, this will be offset by anticipated growth in retransmission revenues, cable affiliate fees and digital advertising revenues.
UVN benefits from its strengthened relationship with Televisa which provides the company with exclusive access to Televisa's content and results in lower programming costs. Fitch views UVN's efforts to invest in more localized content to supplement Televisa's programming and enter into deals that leverage UVN's distribution network as prudent, particularly to the extent that it targets the younger, increasingly U.S. born Hispanic demographic. Further, Fitch views the diversification into digital as a long-term positive for the company's credit profile as it provides some offset to the long-term secular risk facing television broadcasters.
KEY RATING DRIVERS
--Positive View on Hispanic Broadcasting: The positive view is driven by the U.S. Hispanic demographic's ongoing growth in numbers and spending power. UVN benefits from a premier industry position, with duopoly television and radio stations in most of the top Hispanic markets and a national overlay of broadcast and cable networks. The company's networks garner significant market share of Hispanic viewers and continue to generate strong ratings. This large and concentrated audience provides advertisers with an effective way to reach the growing U.S. Hispanic population.
--Increased Competition in Hispanic Media: UVN's prime-time broadcast and cable network ratings have softened, driven by increased competition, particularly from NBC Universal (owns Telemundo, the second largest Hispanic TV broadcast network), the proliferation of other high-quality Hispanic media content, and the more secular impact of declining traditional television audiences. However, UVN currently has incumbent advantage and dominant market presence. Fitch expects these factors, along with its pipeline of Televisa's proven content and incremental investments in local content, to enable it to grow amid these increasing pressures. Fitch believe the company's efforts to invest in content and garner new distribution deals as prudent, particularly to the extent that it targets younger English-speaking and second generation Hispanics.
--Digital Investment a Credit Positive: UVN's management is focused on creating scale in its digital segment. Most recently, UVN acquired Gawker's digital media assets for $135 million. UVN purchased a 40.5% stake in the comedy news website The Onion for $27.1 million in January 2016. In 2015, UVN purchased the Root, an African-American news and culture website. Fitch views the diversification into digital as a long-term positive for the company's credit profile as it provides some offset to the long-term secular risks facing television broadcasters.
--Retransmission Fees and Programming Costs: Fitch believes UVN's growth in high-margin retransmission revenue and cost management efforts will provide an offset to rising programing investments. Long-term, Fitch believes positive operating leverage from top-line growth, specifically in high-margin retransmission revenue, will support continued content and digital investments, with EBITDA margins in the low 40% range.
--Improved Credit Metrics: UVN's total and secured leverage was 7.1x and 6.8x as of June 30, 2016, down from 8.8x and 7.2x at year-end 2014. Most of the reduction stems from Televisa's 2015 conversion of $1.125 billion of the holding company subordinated debentures into warrants for a new class of UVN's common stock that give (Televisa a 22% voting interest in UVN. UVN also used cash to help fund the redemption of $415 million of UVN's 8.5% senior unsecured notes due 2021 in May 2016. The resultant reduction in interest expense, combined with operating cash flow growth, has greatly improved UVN's FCF. Fitch estimates that UVN generated $327 million in FCF for the last 12 months ended June 30, 2016, up from $40 million in 2015.
--Possible Deleveraging Events: There are two events that could result in further deleveraging. First, UVN filed an S-1 for a planned IPO in July 2015. Timing of the IPO remains uncertain and continues to be delayed due to weak market conditions. Second, Univision has filed an application to participate in the BSIA. Management has stated that proceeds from the IPO and BSIA would go towards further debt reduction.
Fitch's key assumptions within the ratings include:
--Mid-single digit growth in Media Networks (TV) in 2016 with low-single digit growth thereafter. Low single digit growth in core TV advertising revenues reflects increased competition in the Hispanic media space. Media Networks revenue growth will be supported by increases in retransmission fees, cable affiliate fees and digital revenues, as well as 'big soccer' tournaments during periods when they air. Political advertising offers minimal upside every other year.
--Radio is expected to continue to experience low-to-mid single digit decline in revenues, reflecting Fitch's view for continued secular pressure.
--Fitch expects total EBITDA margin in the low 40% range. This reflects the positive impact of growing, higher-margin retransmission revenues and higher other subscription fees offset by our expectation of increases in programming expenses in the Media Networks segment. Fitch expects programming expenses increase as Univision supplements Televisa's programming with other programming from a third party or internally-produced by Univision.
--Fitch expects increased FCF generation driven by continued EBITDA growth, reduced interest expense due to the refinancing of higher-cost debt and the conversion of Televisa's subordinated debt into warrants for common stock, and the termination of the Sponsor Management Agreement and Televisa's Technical Assistance Agreement.
--Fitch assumes $1.2 billion in proceeds from IPO and BSIA will be used to repay debt.
Positive: Fitch would consider an upgrade if total leverage falls below 6.0x, and management demonstrates a willingness to remain at this level. Fitch expects deleveraging could occur through EBITDA growth, as well as modest debt reduction from FCF and any potential IPO or BSIA proceeds.
Negative: Negative ratings actions could occur if operating results and FCF are materially lower than Fitch's expectations. This would be contradictory to Fitch's constructive view on the Spanish language broadcasting industry and Univision's positioning within it and could indicate that the company is more susceptible to secular challenges than previously anticipated.
Fitch regards the company's current liquidity as adequate, with modest maturities over the next couple of years.
As of June 30, 2016, liquidity consisted of $33 million in cash, $530 million of availability under its revolving facility capacity, and $162 million available under the accounts receivable securitization facility (up to $400 million). UVN has increased free cash flow generation over the last 12 months, benefiting from both operating cash flow growth and lower interest payments on refinanced debt. Fitch calculates FCF of $327 million for the last 12 months June 2016.
The company has manageable near-term maturities with $159 million in term loan amortizations through 2019. Fitch believes UVN can address these maturities with FCF. UVN's accounts receivable securitization facility matures in 2018 ($238 million outstanding). Fitch expects that UVN will seek to refinance its facility.
The company's next maturity hurdle comes in 2020 when $4.4 billion in senior secured term loans become due. Fitch believes UVN has adequate access to the capital markets, as evidenced by its opportunistic refinancing efforts over 2015, as well as the company's recent amendment and extension of its revolving credit facility. Fitch did not include any proceeds from the planned IPO or sale of broadcast spectrum into its liquidity analysis.
UVN's Recovery Ratings reflect Fitch's expectation that the enterprise value of the company and, thus, recovery rates for its creditors, will be maximized in a restructuring scenario (as a going concern) rather than a liquidation. Fitch estimates a distressed enterprise valuation of $7.6 billion, using a 7.0x multiple and a post-restructuring EBITDA of approximately $1.1 billion. After deducting Fitch's standard 10% administrative claim, Fitch estimates recovery for UVN's senior secured instruments of 77%, which maps to the 71%-90% 'RR2' range and a rating two notches above the IDR to 'BB-'. Fitch believes recovery prospects for UVN's senior secured instruments have improved, driven by Fitch's revised expectation of higher going-concern EBITDA. The UVN senior unsecured notes have no expected recovery, resulting in an 'RR6' and a rating two notches down from the IDR to 'CCC+'.
Fitch has upgraded the following ratings:
Univision Communications, Inc.
--Senior secured to 'BB-/RR2' from 'B+/RR3'.
Fitch has affirmed the following ratings:
Univision Communications, Inc.
--Issuer Default Ratings at 'B';
--Senior unsecured at 'CCC+/RR6'.
Date of Relevant Rating Committee: Sept. 28, 2016
Additional information is available on www.fitchratings.com.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Historical and projected EBITDA(R) is adjusted to add back non-cash stock-based compensation;
--EBITDA(R) metrics are unadjusted for dividends received from Associates/paid to Minorities.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
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