Fitch affirms Viacom's issuer default rating at BBB+, citing strong free cash flow generation, financial flexibility due to lack of sizeable debt; outlook stable
May 11, 2011
– Fitch Ratings has affirmed the 'BBB+' Issuer Default Rating (IDR) and all outstanding ratings of Viacom, Inc. The Rating Outlook is Stable.
The ratings and Outlook reflect the following:
--Viacom's strong free cash flow generation is expected to continue to exceed $1.5 billion annually, driven primarily by the cable networks business. This imparts significant financial flexibility, particularly given the lack of sizeable debt maturities through 2014. As a result, Viacom will easily manage increased dividends (currently approximately $360 million annually) and significant share repurchase activity (Fitch expects approximately $2.5 billion in 2011) at current ratings.
--Fitch expects that Viacom will maintain the financial policies displayed over the past 12 months and that the company will remain solidly within Fitch's 2.25 times (x) total leverage threshold for current ratings, given the company's leverage target of 2.0x or below. Viacom will likely deploy more than 100% of its free cash flow for share repurchases and dividends over the next 12 months. Total shareholder returns that exceed free cash flow generation are within current ratings, to the extent that leverage remains below Fitch's target (total leverage at March 31, 2011 was 1.8x). While material acquisition activity is not anticipated, Fitch believes that in the unlikely event of a large acquisition the company would curtail buybacks in order to keep leverage at its target.
--The ratings are underpinned by the strength in the company's Media Networks segment, highlighted by the cable networks' dual revenue stream of ad revenue and affiliate fees, as well as its low capital intensity and high free cash flow conversion. Fitch expects mid-single digit revenue growth in 2011, affiliate rates continue to benefit from large contract renewals in 2009. The 2010 ratings turnaround at anchor network MTV has shown resiliency to date, as the company's programming continues to resonate with its core audience. However, Fitch views the core youth audience for MTV, as well as for many of Viacom's networks, as inherently capricious, and more susceptible to alternative forms of entertainment. A level of ratings volatility at any given network is factored into the ratings, although Fitch believes the diversity of Viacom's network portfolio will continue to result in overall stability of the audience as a whole.
--The ratings factor in the emergence of over-the-top (OTT), or Internet-based, television content that has increased the risk customers will turn to such alternatives in lieu of traditional pay-TV subscriptions. While this could modestly reduce the demand for content delivered via traditional methods, Fitch does not expect it to have a material impact on Viacom's credit profile or free cash flow over the intermediate term. There are several mitigants to widespread customer cancellation of traditional pay-TV subscriptions, including demographics, a sub-par viewing experience, less compelling available content, sports programming, and DVRs. In addition, Fitch expects the cost saving opportunity of such actions to recede over the coming years. Importantly, Fitch believes large, well-capitalized content providers, such as Viacom, will remain crucial to the industry, and that they will remain rational and protect their long-term franchise values. Lastly, Viacom's cable network programming, which is largely original, should be less susceptible to OTT alternatives than networks that rely largely on syndicated content.
--The ratings incorporate the low-margin and inherent volatility in Viacom's Filmed Entertainment business, given its hit-driven nature. The company's shift of focus to a smaller 'franchise' slate has improved profitability, although the segment continues to make minimal contributions to overall free cash flow. In Fitch's view, the business does not and will not provide upside to the overall credit profile. Current ratings factor in the risk of losses from a weak film slate, which are unlikely to exceed a few hundred million dollars in a given year, as well as ongoing secular challenges facing the home entertainment segment, although the downside is partially mitigated by the higher conversion rate of franchise films.
Viacom's ratings continue to be supported by its:
--Strong cash generating ability, led by the operating dynamics of its core cable networks;
--Overall global prominence of its brands;
--Leading positions in numerous attractive demographics; and
--Solid carriage positions with the multiple service operators (MSOs).
Ratings concerns include:
--Viacom's exposure to cyclical advertising;
--An increasingly fragmented landscape for some of the company's key targeted demographics;
--Secular challenges related to audience fragmentation and time-shifting; and
--The inherent volatility of the movie business.
Fitch recognizes that Viacom's credit profile is strong for the current ratings category given the underlying cable networks business. Over time, it is possible that Fitch could consider the company for an upgrade at the same financial policy. This could occur if Fitch derives incremental comfort with Viacom's cable networks long-term ratings sustainability amid proliferating alternative entertainment options. Further, Fitch would want to see a long-term demonstrated track record by management to operate at the new, tightened leverage target even amid a sustained benign operating environment.
Viacom's liquidity at March 31, 2011 consisted of $1.5 billion of cash and nearly $2 billion available under the company's undrawn revolving credit facility (RCF), which backs up the commercial paper (CP) program. Fitch views the liquidity position as solid, particularly in light of the relatively small upcoming maturities.
Total debt, as of March 31, 2011, was $7.2 billion and consisted primarily of 1) $193 million of senior notes that matured in April 2011, which Fitch expects the company repaid with proceeds from its March 2011 issuance; 2) $597 million of senior notes due 2014; 3) $250 million of senior notes due 2015; 4) $916 million of senior notes due 2016; 5) $4.8 billion of senior notes and debentures due 2016-2055; and 6) $429 million of capital leases and other obligations with various upcoming maturities. Fitch does not anticipate further near-term debt reduction, given minimal near-term maturities and no CP or RCF borrowings outstanding.
Fitch affirms Viacom's ratings as follows:
--Long-term IDR at 'BBB+';
--Senior unsecured notes and debentures at 'BBB+';
--Senior unsecured bank facility due 2013 at 'BBB+';
--Short-term IDR at 'F2';
--CP at 'F2'.
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