Nov 16 - Fitch Ratings has assigned a 'BBB+' rating to Viacom Inc.'s
(Viacom) proposed issuance of 30-year senior unsecured notes.
Fitch currently has a 'BBB+' Issuer Default Rating (IDR) for Viacom. The Rating
Outlook is Stable.
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 new bonds will not have any financial covenants (similar to previous
issuance) and no change of control repurchase requirements.
Viacom is proposing to issue $250 million of new debt due 2043. In addition, the
company is launching an exchange of any and all of the 2036 and 2037 debentures
($2 billion in total) for new 30 year unsecured notes (which will be further
issuance under the proposed 2043 notes). The new notes will be issued to
qualified institutional buyers under Rule 144A of the Securities Act. The
proceeds from the new debt issuance will be used for general corporate purposes
and share repurchases.
Viacom repurchased $2.8 billion of common stock in fiscal year 2012 and expects
to repurchase another $2.5 billion in fiscal 2013. The company's 2012 full year
free cash flow generation (less dividends) was $1.8 billion. Shareholder returns
that exceed free cash flow generation are incorporated into current ratings, to
the extent that leverage remains below Fitch's 2.25x total leverage target.
Viacom's leverage target remains 2.0x. Fitch estimates Viacom's leverage was
1.9x at Sept. 30, 2012. Pro forma for the incremental $250 million of debt,
leverage was 2.0x. Further, Viacom does not have any sizeable term debt
maturities until 2014 when $600 million of unsecured notes come due.
The ratings are underpinned by the strength in the Media Networks segment,
highlighted by its dual revenue stream, low capital intensity and high free cash
flow conversion. A level of ratings volatility at any given network is factored
into the ratings.
Fitch continues to believe that over-the-top (OTT), or Internet-based,
television content will not have a material negative impact on Viacom's credit
profile or free cash flow over the intermediate term. Further, in Fitch's
opinion the proliferation of new OTT entrants and methods of consumption will
continue to drive more demand for Viacom's content. Fitch believes the
uncertainty around the continued ability of cable networks to pass increased
programming costs onto the distributors poses moderate risk to cable network
providers over the longer term. Mitigants for Viacom include Fitch's belief that
the top tier channels will retain leverage with distributors going forward, as
well as the low-cost nature of much of its programming.
Viacom's ratings continue to be supported by its:
--Strong cash generating ability, led by the operating dynamics of its core
--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
--Secular challenges related to audience fragmentation and time-shifting; and
--The inherent volatility of the movie business.
On Nov. 9, 2012, the company also amended its revolving credit facility (RCF),
increasing the size to $2.5 billion from $2.1 billion and extending the maturity
approximately two years to November 2017. It also terminated all $600 million
of its two 364-day RCFs. Viacom's liquidity at Sept. 30, 2012, pro forma for
the amended facility, consisted of $848 million of cash and more than $2.4
billion available (net of letters of credit) under the undrawn RCF. Liquidity
is further bolstered by the aforementioned strong free cash flow. This solid
liquidity position provides substantial flexibility, particularly in light of
the manageable maturity schedule.
Total debt, including new issuance, is $8.4 billion and consists primarily of 1)
$598 million of senior notes due September 2014; 2) $750 million of senior notes
due 2015; 3) $1.3 billion of senior notes due 2016; 4) $5.4 billion of senior
notes and debentures due 2017-2043; and 5) $230 million of capital leases and
other obligations with various upcoming maturities.
WHAT COULD TRIGGER A RATING ACTION
Positive: Fitch recognizes that the credit profile is strong for the rating
category given the underlying business. Over time, it is possible that Fitch
could consider the company for an upgrade at the same financial policy if Fitch
derives incremental comfort with the cable networks' audience sustainability
amid proliferating alternatives. Fitch also wants to see a long-term
demonstrated track record of operating at the new leverage target amid a
sustained benign operating environment.
Negative: Rating pressures could occur if Viacom indicates it will operate with
a more aggressive financial policy, with leverage above Fitch's 2.25x target for
a sustained period of time. A downgrade could also occur if current secular
challenges or material weakness in network ratings drive sustained revenue and
Fitch rates Viacom as follows:
--Long-term IDR at 'BBB+';
--Senior unsecured notes and debentures at 'BBB+';
--Senior unsecured bank facility due 2017 at 'BBB+';
--Short-term IDR at 'F2';
--CP at 'F2'.