Oct 18 - Fitch Ratings has affirmed the UK-based pay-TV operator, British Sky Broadcasting Group plc’s (Sky) Long-term Issuer Default Rating (IDR) and senior unsecured rating at ‘BBB+'. The Outlook for the Long-term IDR is Stable.
The affirmation is based on the robustness of Sky’s pay-TV business despite the challenging macroeconomic environment and continued competitive pressure from other triple-play services operators in the UK. Although revenue and EBITDA growth are expected to slow over the next few years, partly due to increasing competition, the Stable Outlook reflects Sky’s low leverage and solid cash flow generation. The company reported net debt to EBITDA of 0.6x at year end June 2012 (end-FY12), with sufficient headroom to absorb management’s proposed GBP500m share buy-back.
Greater competition is the main source of uncertainty for Sky’s credit profile over the longer term. The UK market for triple-play is one of the most competitive in Europe with BT Group plc (‘BBB’/Stable), Sky and Virgin Media Inc (‘BB+'/Stable) each a market leader in one of the three segments. Sky has the largest triple-play subscriber base in the UK, with 32% of all its customers now using triple-play services. BT Group recently strengthened its offering with the rollout of its fibre network and its foray into football and rugby rights shows its willingness to pay for attractive content to compete in pay-TV. Virgin Media differentiates its offering with its high-speed broadband network and TiVo, its interactive TV service.
Sky’s content costs may continue to rise over the medium-term as Sky faces greater competition for the broadcast rights to attractive content. In June 2012, Sky successfully bid GBP2.3bn for the rights to show 116 English Premier League (EPL) games per season, over the next three years starting in August 2013. This represents a 40% increase on Sky’s current deal of GBP1.6bn, meaning Sky is spending GBP220m more per year on EPL rights in FY14-FY16. This may dent its profitability, but the group has some flexibility to protect margins by reallocating programming expenditure and cutting costs in other areas.
Sky’s launch of its IPTV service (NOW TV) indicates that it is responding to growing competition from over-the-top (OTT) content providers such as Netflix and Amazon’s LoveFilm, which stream content over the internet at competitive prices relative to traditional pay-TV subscription. Sky will have to balance the potential market of 13m UK homes that currently don’t take pay-TV services against the need to ensure it doesn’t cannibalise its existing customer base. Fitch does not expect NOW TV to be a significant source of Sky’s revenue in the next two years.
Regulatory risks for Sky have eased recently. In September, Ofcom (UK’s broadcasting, telecoms and postal regulator) concluded that Sky is a “fit and proper” company to hold a broadcasting licence, after parent company News Corporation’s phone hacking scandal. Two other rulings by the Competition Commission and the Competition Appeal Tribunal respectively found no serious threat to competition in the markets for premium pay-TV movies and the live broadcast of sporting events.
The group’s liquidity profile is robust. Sky had GBP1.17bn in cash and short-term deposits (as of 30 June 2012), an undrawn revolving credit facility of GBP743m which matures in October 2017, and does not have any bond repayments until October 2015.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- An adverse change in industry dynamics including price erosion, increasing capital intensity and increasing regulatory pressure
- Funds from operations (FFO) adjusted net leverage sustained over 2.0x (0.85x at end-FY12) could result in negative action. However, the rating can tolerate temporary spikes in leverage above this level following events such as an acquisition, as long as there is a clear path back to 2.0x.
Positive: Future developments that may, individually or collectively, lead to positive rating action include
- Positive action is unlikely given that Sky’s concentration of business in a single country and sector is a constraint on the rating.