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Fitch Rates Viacom's Proposed Note Offering 'BBB+'
[December 03, 2014]

Fitch Rates Viacom's Proposed Note Offering 'BBB+'


Fitch Ratings has assigned a 'BBB+' rating to Viacom (News - Alert) Inc.'s (Viacom) proposed issuance of benchmarked sized five- and 20-year senior notes. Fitch currently has a 'BBB+' Issuer Default Rating (IDR) for Viacom. The Rating Outlook is Stable.

Proceeds from the new debt issuance will be used for general corporate purposes, including repayment of existing debt including Viacom's 1.250% notes due 2015 ($600 million of principal outstanding), borrowings under the commercial paper program and share repurchases. Fitch calculates pro forma leverage at approximately 3x. Fitch expects Viacom to manage its leverage within its stated targets of 2.75x to 3x range.

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 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.

Total face value (FV) of debt and capital leases outstanding as of Sept. 30, 2014 was approximately $13.2 billion, reflecting a 7% increase relative to fiscal year-end 2013 (Sept. 30, 2013). Consolidated leverage, based on FV of debt and capital leases, of 2.95x as of the latest 12 months (LTM) period ended Sept. 30, 2014 marks a nominal increase from 2.87x as of fiscal year-end 2013.

Fitch expects that Viacom will manage its share repurchase program within the context of its 2.75x to 3x leverage target. Fitch believes that Viacom will place a priority on managing its balance sheet to its leverage target and curtail the level of share repurchases in the event the macro-economic environment weakens or the company's operating profile begins to deteriorate. As of Nov. 12, 2014, Viacom had approximately $6.24 billion of capacity under its share repurchase program.

Fitch acknowledges that the contemplated level of share repurchases is expected to exceed annual free cash flow (FCF; defined as cash flow from operations less capital expenditures and dividends) generation; however, the company maintains the ability to reduce share repurchases to maximize financial flexibility should the need occur. Viacom generated approximately $1.9 billion of FCF for fiscal year-end 2014. Shareholder returns exceeding FCF generation are incorporated into current ratings to the extent that leverage remains at or below Fitch's 3x total leverage threshold.

In Fitch's view, Viacom's liquidity is strong and supported by expected FCF generation. Additional financial flexibility is provided by the company's $2.5 billion revolving credit facility (fully available as of Sept. 30, 2014) and $1 billion of cash on hand as of Sept. 30, 2014. Commitments under Viacom's revolver expire on Nov. 18, 2019. Upcoming maturities, pro forma for the planned refinancing discussed above, include $250 million de in 2015, approximately $1.3 billion due in 2016 and $1 billion due in 2017. The maturities are well-laddered and manageable considering expected FCF generation, reliable market access and back-up liquidity.



KEY RATING DRIVERS

--Sufficient capacity exists within the current ratings to accommodate Viacom's current share repurchase plans;


--Viacom's portfolio of cable networks and leading global brands underpin the ratings;

--Viacom's track record of conservative financial policies and strategies;

--Business and financial risks are comparable with 'BBB+' rated media peers.

Overall, Fitch's ratings incorporate Viacom's strong and consistent FCF high level of financial flexibility, solid credit protection metrics, sound liquidity and leading market positions within its core businesses in numerous attractive demographics. A level of ratings volatility at any given network is also factored into the ratings. Fitch anticipates the company's operating profile will strengthen in fiscal 2015 largely based on stable macro-economic and advertising markets, improving ratings within key networks, and double-digit affiliate revenue growth.

Rating concerns center on the company's ability to adapt to changing media consumption patterns and technology platforms as well as its capacity to deliver programming to its cable networks that drive incremental share of an increasingly fragmented viewing audience. Additional ratings considerations include Viacom's exposure to cyclical advertising revenues (moderate relative to peer group) and the inherent volatility of the company's Filmed Entertainment business segment.

RATING SENSITIVITIES

Positive: Upward ratings momentum is unlikely during the current ratings horizon. Positive rating action would likely coincide with Viacom adopting a more conservative financial policy highlighted with a gross leverage target below 2x. Meanwhile Viacom will need to demonstrate the sustainability of its operating profile amid ongoing competitive pressures, changing media consumption patterns and evolving technology platforms.

Negative: Negative rating actions are more likely to coincide with discretional actions of Viacom's management including, but not limited to, the company adopting a more aggressive financial strategy or event-driven merger and acquisition activity, that drives leverage beyond 3.0x in the absence of a credible de-leveraging plan. Additionally, negative rating actions could result should Fitch begin to observe a negative impact from alternative content distribution platforms and other forms of entertainment that is significantly larger than Fitch's expectations or should a material weakness in network ratings drive sustained revenue and EBITDA deterioration.

Fitch currently rates Viacom as follows:

--Long-term IDR 'BBB+';

--Senior unsecured notes and debentures 'BBB+';

--Senior unsecured bank facility due 2017 'BBB+';

--Short-term IDR 'F2';

--Commercial paper 'F2'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology, Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=941115

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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