April 7, 2017 / 9:14 PM / 3 months ago

Fitch Downgrades Radio e Televisao Bandeirantes's IDR to 'CCC'

15 Min Read

(The following statement was released by the rating agency) CHICAGO, April 07 (Fitch) Fitch Ratings has downgraded Radio e Televisao Bandeirantes Ltda.'s (RTB) Long-Term Foreign-Currency And Local-Currency Issuer Default Ratings (IDR) to 'CCC' from 'B'. Fitch has also downgraded the company's National long-term rating to 'CCC(bra)' from ' BBB-(bra)'. The Rating Negative Outlook was removed. The downgrades reflect RTB's weak liquidity and significant EBITDA erosion during 2016 due to dampened demand for advertising in the challenging economic conditions in Brazil. In addition, the company is facing high refinancing risk given its reliance on short-term bank loans with expensive interest rates amid weak performance. RTB's financial flexibility remains limited given its precarious cash position and it could face limited access to credit should it fail to show signs of performance recovery in 2017. RTB is part of Grupo Bandeirantes de Comunicacao (Band), a diversified media group and one of the group's major free-to-air (FTA) TV and radio broadcasters in Brazil. RTB's ratings are based on Band's combined credit profile given the centralized group's cash management and strong operational linkage among the group's companies under shared executives and control by the same major shareholder. KEY RATING DRIVERS Weak Liquidity; High Refinancing Risk Fitch expects RTB to continue to face limited financial flexibility as its short-term debt matures, which would require continued support from banks for credit extension at high interest expenses. The company's liquidity profile remains weak given its high proportion of short-term debt, which was BRL302 million and represented 37% of its total debt as of September 2016, and low cash position, despite successful refinancing of most of its short-term debt maturities during 2016. Fitch does not expect RTB's high refinancing risk to be eased in the medium term given the slow cash flow recovery under the difficult operating environment. Operational challenges remain as RTB aims to execute its cost savings initiatives while ensuring content appeal to improve cash flow generation and comfortably cover its high finance expenses. Negative FCF: Increased leverage Fitch believes RTB will report negative FCF generation during 2016, due to EBITDA deterioration and high interest expenses. Fitch estimates the company's 2016 EBITDA will have fallen significantly to well below BRL200 million from the 2015 level of BRL275 million. The company's EBITDA during the first nine months of 2016 was BRL108 million, which was 21% below the same period in 2015, and Fitch believes that further erosion during 4Q16 was likely based on the weak-industry trend. Any sizable EBITDA recovery in 2017 could be challenging given weak advertising demand outlook along with the company's lack of key sport event content. Given muted EBITDA growth, Fitch forecasts the company's FCF generation to remain negative in the medium term. Fitch forecasts the company's high interest expenses, estimated to be in the range of BRL140 million-BRL150 million in 2017 and 2018, to consume most of its operational cash flow generation. Without any debt reduction, Fitch forecasts the company's net leverage to remain at around 5.0x over the medium term. Unfavorable Industry Trend: Media companies in Brazil continue to experience weak demand for advertising due to the unfavorable macro-economic environment in Brazil and waning importance of FTA TV due to pay-TV and internet advertisement growth. Weak market conditions will continue to impede any material advertising price improvements as advertisers' budgets remain constrained. Fitch does not foresee any material recovery in the advertising demand in the near term given current weak macro environment in Brazil. RTB's market position is weak, and Fitch does not foresee any material improvement in the company's market share given the intense competitive landscape. The company is the fourth-largest TV operator, with about 4% market share, in a highly concentrated industry in Brazil, where the market is dominated by Globo Participacoes S.A. Diversified Media Portfolio: RTB is a nationwide diversified media group in Brazil. Its main business is FTA television and radio, which combined represented close to 70% of revenue in 2015. Band boasts strong operational integration across various media platforms backed by the sharing of production infrastructure and talent, as well as the distribution of content under the common management. This helps the group maintain quality of content across the segments with an efficient cost structure. DERIVATION SUMMARY RTB's credit profile is weak compared to its regional peers in the media segment. The company's low viewership market position and weak pricing power for advertising is a key credit weakness compared to other media operators in the investment-grade categories. RTB's weak liquidity profile and access to credit, given high short-term debt reliance and financing cost, as well as a predominantly collateralized debt profile compares unfavorably to TV Azteca, S.A.B. de C.V., which is rated 'B+'/Stable. The company's corporate governance, with its complex group structure, is considered weak, in line with the rating category. No country-ceiling, parent/subsidiary or operating environment aspects impact the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - No material EBITDA improvement in 2017 given the unfavorable macro factors and weak demand for advertising; - Continued refinancing of its short-term debt maturities in 2017; - TV viewership market share of about 4% over the medium term; - Uncurbed negative FCF generation in 2017 and 2018; - Net leverage of around 5x in the short- to medium-term. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --Unlikely in the short- to medium-term, given the company's precarious liquidity position and unfavorable economic conditions in Brazil negatively affecting the advertising sector. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --Failure to proactively manage its short-term debt maturity profile; --Continued EBITDA contraction and negative FCF generation; --No material short-term debt reduction, resulting in continued weak financial flexibility; LIQUIDITY RTB's liquidity is weak due to high short-term debt balance, which amounted to BRL302 million, against a cash balance of BRL59 million as of Sept. 30, 2016. The company's financial flexibility will remain limited as it will continue to rely on creditors' support to manage the short-term debt rollover. FULL LIST OF RATING ACTIONS Fitch has downgraded the following ratings: Radio e Televisao Bandeirantes Ltda. --Long-Term Foreign-Currency and Local-Currency IDRs to 'CCC' from 'B'/Outlook Negative; --National long-term rating to 'CCC(bra)' from 'BBB-(bra)'/ Outlook Negative. 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