TEXT - S&P affirms News Corp ratings
Overview -- We have concluded our review of News Corp.'s management and governance following the identification of deficiencies related to allegations of phone-hacking and bribery in the U.K. In our analysis, we placed particular emphasis on the introduction by the company of new compliance standards and practices. -- We are affirming our 'BBB+' corporate credit rating, and removing all ratings from CreditWatch, where they were placed with negative implications on July 18, 2011, although we recognize the potential for future reputational, business and financial risks related to the criminal prosecution of former executives of NI Group Limited. -- Separately, we expect that credit metrics and financial policy for the new entertainment entity will remain relatively unchanged following the company's planned split-off of its publishing businesses. -- The stable rating outlook reflects our expectation that News Corp. will be able to maintain its fully adjusted leverage below our 3.25x rating threshold while preserving strong or adequate liquidity following the proposed split-off, and despite potential acquisitions, ongoing investments, and future civil and criminal monetary penalties. Rating Action On Nov. 30, 2012, Standard & Poor's Ratings Services affirmed its 'BBB+' corporate credit rating on New York-based diversified media company News Corp. following our review of management and governance standards and practices and we removed the ratings from CreditWatch with negative implications, where they had been placed on July 18, 2011. The outlook is stable. Rationale The ratings affirmation follows the completion of our review of the company's management and governance profile, evidenced by strengthened ethics and compliance practices and training, as well as our assessment of the longer-term impact of the proposed spinoff. News Corp. is instituting a new compliance structure, which we believe could reduce the potential for future unlawful or improper conduct at the business-unit level. The success of these new policies, training and procedures will ultimately be evidenced by the company's track record over the next several years. We score management and governance as "Fair" under our criteria, reflecting our view that there are still significant risks relating to its board effectiveness, the influence of controlling ownership, and a history of legal infractions and ethical lapses ( See "General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers," published Nov. 13, 2012, on Ratings Direct). To date, we believe the reputational and business risks cited in our July 18, 2011 CreditWatch listing been relatively limited, but do include sizeable legal costs and the forfeiture of certain business opportunities (such as closure of a profitable publishing business and abandoning of the company's attempt to take full ownership of the U.K.'s largest pay TV operation). We are aware of ongoing investigations in the U.K. and U.S., and the publication of Part I of the Leveson Inquiry and will continue to monitor any potential future repercussions for management credibility and the company's creditworthiness. We view News Corp.'s business risk profile as "strong," based on our criteria. Our assessment weighs the company's market positions in broadcast TV, cable-TV programming, newspaper publishing, newspaper inserts, filmed entertainment, and its significant investments in satellite direct-to-home (DTH) businesses in the U.K., Italy, and Germany. We expect to maintain our "strong" business profile assessment following the split-off of its newspapers, book publishing, free-standing inserts, in-store marketing businesses, education businesses, and Australia-based media assets. Although the spinoff modestly decreases business diversity, we view the publishing businesses as subject to significant long-term structural risks, in our opinion. We view News Corp.'s financial risk as "intermediate," based on its moderate leverage, healthy conversion of EBITDA to discretionary cash flow, and high cash balances. In addition to its filmed entertainment, cable and broadcast networks, satellite DTH, and newspaper publishing businesses, News Corp. has significant investments in nonconsolidated associate companies from which it receives dividend distributions--the largest contributor being BSkyB (39.1% owned). The feature film segment has been an industry leader in profitability and cost management, but, like other players, has experienced secular pressure on DVD sales, and seeks to boost film revenue through new distribution channels while aiming to preserve DVD revenue. Broadcasting operations face somewhat less favorable long-term trends because of audience fragmentation, and like peers, the Fox network has experienced primetime ratings declines in the 2012-2013 broadcast season. As of Nov. 25, 2012, audience ratings among adults 18-49 are down 29% for the Fox network. Lower audience ratings typically require the network to issue 'make-goods' or alternative commercial inventory to advertisers, which negatively impact advertising revenue. We see some risk to broadcast network performance in fiscal 2013, especially if prime-time ratings leader "American Idol" continues to underperform. Cable networks continue to post strong affiliate rate increases, which we believe will be a source of continued growth in fiscal 2013 because of carriage renewals for networks such as Fox News and FX. We also expect continued growth in distribution and revenue of the Fox International Channels. Under our base-case scenario in fiscal 2013, assuming restructuring and legal expenses moderate slightly from fiscal 2012, we believe revenue could grow at a mid-single-digit percentage rate, while EBITDA could increase at a mid-to-high-single digit percentage rate. We expect cable and television to be the main growth drivers, the latter benefiting from political advertising in fiscal 2013. We expect declines at Sky Italia to continue at the first fiscal quarter pace; EBITDA fell roughly 50% due to the weak economy in Italy and subscriber declines. We expect Sky Italia could remain a drag for several years, due to economic conditions in Italy and expensive sports programming at Sky, namely, licensing fees for the Olympics and World Cup over the next several years. We expect the EBITDA margin to be relatively flat in fiscal 2013 at around 20% to 21%, but could increase to the mid-20% area in fiscal 2014 assuming completion of the spin-off of lower margin publishing properties, and benefiting from the absence of losses at the spun-off education business. Risks to our base-case forecast include further weakening of advertising revenue and audience losses at the Fox network. Balance-sheet gross debt to EBITDA was about 2.3x as of Sept. 30, 2012, compared to 2.2x in the year-ago period, as EBITDA growth was offset by new debt issuances of $1 billion. Pension- and lease-adjusted gross debt plus all debt-like elements to lease- and pension-adjusted EBITDA was about 2.8x. Conservatively assuming all existing debt remains at the entertainment entity, and the publishing entity is spun off with $2 billion to $3 billion of cash, we estimate pro forma adjusted debt to EBITDA will be relatively unchanged by fiscal 2014, at around 2.6x--still under our current 3.25x leverage threshold for the existing company. Currently, we do not expect any shifts in financial policy at the remaining entertainment entity that would increase leverage from current levels. Conversion of EBITDA to discretionary cash flow was healthy at about 38% for the 12 months ended Sept. 30, 2012, relatively flat with the prior year period. We expect conversion to remain in the high-30% to low-40% area in fiscal 2013. The company repurchased roughly $4.2 billion shares for the 12 months ended Sept. 30, 2012, under its $10 billion share repurchase plan. We believe share repurchases could decline in fiscal 2013 compared to the $4.7 million of share repurchases in fiscal 2012, due to acquisitions and potential cash needs and distributions related to the proposed spin-off. Going forward, given News Corp.'s cash balances and cash flow generation, we believe share repurchases will remain manageable, but in conjunction with unexpected acquisitions, could reduce financial flexibility. Liquidity Based on our current analysis, we believe News Corp. has "strong" liquidity over the next 24 months. In addition, we believe the company has significant capacity to cover most scenarios of litigation-related financial penalties, based on an array of precedents, and still maintain strong liquidity. Expectations and assumptions that support our liquidity assessment include the following: -- We expect sources of liquidity to exceed uses by 1.5x or more over the next 12 months and to remain above 1.0x over the next 24 months. -- We also expect net sources to remain positive, even if EBITDA declines by 30%. -- In our opinion, News Corp. has a wide margin of compliance with its 4.5x debt leverage covenant, which could withstand an EBITDA decline of 50% without breaching the covenant. -- Because of its high cash balances and good discretionary cash flow generation, we believe the company could absorb high-impact, low-probability adverse business developments without refinancing. -- We view News Corp.'s relationships with bank lenders as solid and well established. -- In our opinion, the company has a generally high standing in the credit markets. -- News Corp. typically demonstrates prudent financial risk management, in our view, but has shown an appetite for sizable, unexpected acquisitions and investments. News Corp.'s sources of liquidity include cash balances (which stood at roughly $12 billion as of Sept. 30, 2012), and nearly full access to its $2 billion revolving credit maturing in May 2017 (which it has only used for issuances of LOCs). In addition, funds from operations (FFO) of about $4.7 billion for the 12 months ended Sept. 30, 2012, could increase modestly over the next 12 months assuming no material rise in restructuring and legal expenses. We expect that uses of liquidity over the next 12 months will include capital expenditures (which we estimate between $1.0 billion and $1.2 billion), investments in equity affiliates, shareholder dividends of roughly $630 million, and nominal debt maturities of $273 million in fiscal 2013. We expect investment spending to increase in fiscal 2013 due to the acquisition of ESPN Star Sports, Consolidated Media Holdings ($2 billion), and the purchase of a 49% stake in the YES Network. Other potential, but noncontractual, uses of liquidity include News Corp.'s new $5 billion share repurchase program. As a result, we expect ending cash balances of around $5 billion to $6 billion for fiscal 2013. Outlook The rating outlook is stable and addresses our expectation that News Corp. will be able to maintain its fully adjusted leverage below our 3.25x threshold for the company at a "BBB+", while preserving strong to adequate liquidity following the proposed spin-off, and despite potential acquisitions, ongoing investments, and possible future civil and criminal penalties. We will continue to monitor the longer-term impact of ongoing investigations in the U.K. and U.S., and could recommence a CreditWatch or lower the rating due to unexpected business ramifications outside the U.K. publishing assets. In addition, a rating downgrade could result if leverage were to increase and remain above 3.25x for a prolonged period because of acquisitions or shareholder returns, in conjunction with slower-than-expected growth or underperformance at key operating segments, because of either competitive or industry pressures.. Slower growth could limit the company's ability to absorb acquisition-related spikes in leverage. An upgrade, which we see as unlikely, would likely an established track record regarding new management and governance practices, no meaningful financial or reputational impact from ongoing investigations in the U.K. and U.S., a further conservative shift in financial policy, and greater clarity with respect to leadership succession. Given current ownership and control, we view an upgrade as unlikely and further believe that a 'BBB+' rating may represent management's most efficient level of credit quality that also balances growth objectives and equity returns. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; CreditWatch Action To From News Corp. News America Inc. Corporate Credit Rating BBB+/Stable/-- BBB+/Watch Neg/-- News Corp. Senior Unsecured BBB+ BBB+/Watch Neg News America Inc. Senior Unsecured BBB+ BBB+/Watch Neg News Corp. Exchange Trust Preferred Stock BBB- BBB-/Watch Neg
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