CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to Viacom Inc.'s (Viacom) offering of benchmark-sized five-, and 10- year senior unsecured notes. The Rating Outlook is Negative.
Proceeds from the offering are expected to be used to refinance upcoming maturities including the repayment of $400 million aggregate principal amount of 2.500% notes due December 2016, repayment $500 million aggregate principal amount of 3.500% due April 2017, and borrowings under the company's commercial paper (CP) program.
Fitch currently rates Viacom's Issuer Default Rating (IDR) 'BBB'. Approximately $12.8 billion of debt was outstanding at June 30, 2016, including $453 million of CP. Consolidated leverage, based on face value of debt and capital leases, was 3.6x as of the latest 12 months (LTM) period ended June 30, 2016. A full list of ratings follows at the end of this release.
The notes will be issued under Viacom's existing indenture (dated April 12, 2006, as periodically supplemented) and will be pari passu with all existing debt. The notes are subject to interest rate adjustments if the notes are downgraded below investment grade with a 25 bps coupon step up if the notes are downgraded one notch below investment grade and 25 bps for each notch below. If the ratings are subsequently upgraded, the coupon adjusts based on the step up schedule.
The notes include a change of control put offer at 101% upon a change of control and subsequent downgrade of the notes to non-investment grade. A change of control includes sale of all or substantially all the assets of the company, a majority of directors of the board cease to be continuing directors, any person/entity other than Redstone Family Members acquiring 50% or more of the voting control of the company, or the consummation of a going private/Rule 13-3 transaction.
The Negative Outlook incorporates uncertainty related to Viacom's ability to stabilize and strengthen its operating profile amid the persistent secular challenges to its business model. Viacom's new board of directors and management will face the challenge of strengthening the company's operating profile and competitive position. The strategies currently in place have struggled to produce tangible evidence that they are regaining positive operating momentum and reducing volatility in the company's key cable network businesses.
KEY RATING DRIVERS
Appropriate Financial Strategy: The changes to Viacom's capital allocation policy, namely the reduction of its dividend, the suspension of its share repurchase program and the reallocation of free cash flow to reduce debt coupled with changing its strategic programming focus and investment towards more original scripted programming, are appropriate given the current operating environment.
Leadership Transition Underway: Fitch recognizes the resolution of litigation involving Viacom's controlling shareholder and its board of directors and the resultant orderly transition of Viacom's leadership and board is a positive development for Viacom's credit profile and reduces the event risks attributable to the overall credit profile. Fitch cautions, however, that the leadership changeover is a two-step process. Fitch anticipates a new CEO will be in place by mid-November and that Viacom's financial and strategic plans will remain in flux until the board agrees on a new president and CEO and final plans are in place.
Limited Financial Flexibility: Fitch recognizes the reduction of the dividend will improve overall financial flexibility, but operational headwinds, elevated leverage combined with ongoing investment in original programming and production are still expected to pressure FCF generation and limit the company's overall financial flexibility.
Cable Network Portfolio Anchors Ratings: The dual stream, recurring, high-margin revenue base of the cable networks remains the foundation for Viacom's ratings. While recognizing a level of viewership ratings volatility at any given cable network is factored into the current ratings, Fitch has concerns around weakened TV ratings at Viacom's cable networks. Fitch does not expect Viacom to lose any distribution deals, but continued ratings softness could weaken its negotiating position. Fitch believes that the higher level of investment in original programming has begun to improve ratings at key networks and expects that continued investment will lead to further improvements and will contribute to the strengthening of the company's operating profile.
Growing Secular Risks Present: The ongoing secular threats presented by changing media consumption, emerging distribution platforms and technology evolution and adoption have negatively affected Viacom's operating performance. Fitch recognizes the risks inherent in the company's strategies to address the secular threats and adapt to changing industry dynamics, monetize changing viewing habits, and recapture their target audience that continues to shift away from viewing media in a linear, measured environment.
Advertising Revenue Exposure Highlights Risks: Rating concerns include exposure to cyclical advertising revenues (at 38% of revenues, moderate relative to peer group) and the company's capacity to adapt to ever-changing media consumption patterns and technology platforms. Fitch's ratings recognize the volatility within Viacom's operating profile given the exposure to cyclical advertising revenues and the hit-driven nature of its cable networks and film studio; however, there is minimal tolerance within the current ratings for further weakening of Viacom's operating profile.
Fitch's key assumptions within the rating case include:
--Global advertising revenues decline to low single digits during fiscal 2016 followed by flat revenue growth during fiscal 2017. Domestic advertising revenues are expected to decline 4% during fiscal 2016 and flat during fiscal 2017.
--Affiliate fee revenue is expected to decline high-single digits during fiscal 2016 due primarily to timing of content distribution agreements with SVOD providers. Going forward, affiliate fee revenues are expected to grow to low single digits. Fitch does not expect Viacom to lose any meaningful distribution deals.
--Higher programming and production costs pressure EBITDA margins within the company's Media Networks segment. Fitch anticipates fiscal 2016 margins to range between 37% and 38%, and expanding modestly to approximately 39% during fiscal 2017.
--Fitch assumes typical volatility and continued weakness within in the Filmed Entertainment segment over the ratings horizon.
--Continued suspension of share repurchases in light of weakening operational profile and minimal merger and acquisition activity.
--All maturing debt is expected to be refinanced during the ratings horizon.
Positive: Upward ratings momentum is unlikely during the current ratings horizon. Stabilization of the Outlook at the current rating is predicated on the company successfully executing on its strategies to address persistent secular threats to its business and recapturing positive operating momentum, as evidenced by sustainable positive domestic advertising and affiliate fee revenue growth and expanding operating margins. In addition, Fitch needs to observe a rational resolution to the pending litigation related to the company's ongoing corporate governance issues and a clear articulation of a strategy to strengthen the company's operating profile.
Negative: Negative rating actions are more likely to coincide with the company's inability to strengthen its operating profile and reduce leverage below 3.5x. Resumption of share repurchase activity or other aggressive financial policy decisions that delay the anticipated improvement of Viacom's credit profile would also result in negative rating action. Moreover an unfavourable resolution to the corporate governance issues and pending litigation can lead to negative rating action.
Viacom's weakening operating profile is diminishing its financial flexibility. In step with the company's weakened operating results, FCF generation, margin and FCF leverage metrics have also deteriorated. Led by Viacom's Media Networks segment, the company generated approximately $866 million of FCF (defined as cash flow from operations less capital expenditures and dividends) during the LTM period ended June 30, 2016, reflecting a 46% decline relative to company's reported FCF generation during its fiscal year end 2015. Operational headwinds, higher cash taxes and interest costs along with higher programming and production costs are expected to continue hindering FCF generation. Fitch expects FCF generation after dividends during fiscal 2016 to range between $500 million and $550 million before improving to approximately $1 billion during fiscal 2017.
In Fitch's view, Viacom's liquidity is adequate and supported by expected FCF generation. Additional financial flexibility is provided by the company's $2.5 billion revolving credit facility ($2.1 billion available as of June 30, 2016, with $453 million of outstanding commercial paper) and $192 million of cash on hand as of June 30, 2016. Viacom has deemed substantially all of the cash held by its foreign subsidiaries as permanently reinvested in its foreign operations and does not intend or foresee a need to repatriate any of this cash. Commitments under Viacom's revolver expire on Nov. 18, 2019. The credit facility contains an interest coverage covenant requiring coverage for the most recent LTM period to be at least 3.0x.
FULL LIST OF RATINGS
Fitch currently rates Viacom as follows:
--Long-Term IDR 'BBB';
--Senior unsecured notes and debentures 'BBB';
--Senior unsecured bank facility due 2019 'BBB';
--Short-Term IDR 'F2';
The Rating Outlook remains Negative.
Date of Relevant Rating Committee: Sept. 22, 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:
--No material adjustments have been made that have not been disclosed in public fillings of this issuer.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
Short-Term Ratings Criteria for Non-Financial Corporates - Effective Aug. 13, 2015 to Sept. 27, 2016 (pub. 13 Aug 2015)
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