(The following statement was released by the rating agency)
NEW YORK, February 21 (Fitch) Fitch Ratings has assigned a 'BB+'
Viacom Inc.'s (Viacom) issuance of 40-year junior subordinated
rating reflects standard notching for a hybrid instrument with
characteristics. In addition, Fitch affirmed Viacom's 'BBB'
Rating (IDR). The Rating Outlook is Negative.
Proceeds from the offering are expected to be used to repay the
and September 2018 maturities. The issuance is modestly
deleveraging given the
equity-like characteristics of the junior subordinated
debentures and Fitch's
50% equity treatment of this type of hybrid instrument.
The Negative Outlook reflects that while Fitch views the
issuance and resulting modest debt reduction positively, pro
forma leverage will
remain elevated above our 3.5x threshold level, weakly
positioning the company
in the 'BBB' rating category. The Negative Outlook also
continued weaker than anticipated operating performance and the
execution risk regarding its turnaround strategy amid increasing
challenges. Fitch recognizes the company's planned
however, we would consider a negative rating action if
reduction or improved operating trends fail to bring gross
leverage down to
levels more consistent with the 'BBB' rating category.
Viacom's new management team has recently taken actions to
performance and define a turnaround strategy. Specifically
Viacom will re-focus
on its "flagship" cable networks (Nick, Nick Jr., MTV, Comedy
Central, BET and
the re-branded Paramount Network) and re-allocate content
spending toward these
core brands. Viacom also intends to manage content and talent
across its properties and use IP and talent from Media Networks
bolster its film slate at Paramount. This follows Viacom's Jan.
that Chinese film companies, Shanghai Film Group (SFG) and
Huahua Media, will
provide an estimated $1 billion cash investment to fund 25% of
slate costs over the next three years.
Fitch believes that Viacom has outlined a more coherent strategy
content and talent and deploy it more rationally across its
and we view this positively as the appropriate strategy to take
operational woes. However, Fitch remains concerned about the
surrounding execution of these efforts to stabilize performance.
momentum in Media Networks will take time as Viacom works to
core brands with improved content that resonates with audiences
and there will
be a lag between improved ratings at Viacom's cable networks in
key demos and
the potential for improved advertising and affiliate fee growth.
Fitch expects the shift in focus towards the six "flagship"
cable networks could
relieve some pressure in affiliate renegotiations with
video providers (MPVDs) as existing contracts expire. However,
we think this
strategy shift, which de-emphasizes Viacom's other cable
networks, reflects the
increasing secular pressure in the pay-TV ecosystem and the
impact this is
having on content providers.
KEY RATING DRIVERS
Appropriate Financial Strategy: The changes to Viacom's capital
policy, namely the reduction of its dividend, suspension of its
program and the reallocation of free cash flow (FCF) to reduce
debt coupled with
changing its strategic focus to its six "flagship" cable
appropriate given the current operating environment. Fitch also
positively Viacom's efforts to de-risk Paramount's film slate
estimated $1 billion cash investment from Chinese film companies
SFG and Huahua
Media, which will provide some modest improvement to Paramount's
performance and Viacom's consolidated operating cash flow.
Leadership Transition: On Dec. 12, 2016, National Amusements
announced that it ended its exploration of a possible merger
between CBS Corp.
and Viacom. Concurrently, Viacom named Bob Bakish as its
permanent CEO. While
Fitch would have considered a possible re-combination with CBS
Corp. a positive
for Viacom's credit profile, the removed uncertainty regarding
leadership transition is a positive development for Viacom as an
company. Since Bakish was named permanent CEO, he has taken a
number of steps
to change internal management in an effort to break down silos
organization and has outlined a more coherent strategy and
restructuring for the
Limited Financial Flexibility: While the recently announced
hybrid issuance, the
de-risking of the Paramount film slate and the reduction of the
improve overall financial flexibility, operational headwinds,
combined with ongoing investment in original programming and
still expected to pressure FCF generation and limit the
Cable Network Portfolio Anchors Ratings: The dual-stream,
revenue base of the cable networks remains the foundation for
While a level of viewership ratings volatility at any given
cable network is
factored into the current ratings, Fitch remains concerned about
the weakened TV
ratings at Viacom's cable networks. Fitch expects that
outlined turnaround strategy will take time to show
improvements. While Fitch
does not expect Viacom to lose any distribution deals, continued
softness could weaken its negotiating position. However, this
may be mitigated
by the company's focus on the six "flagship" networks and the
de-emphasis on Viacom's less prominent networks, which could
efforts to renegotiate affiliate agreements.
Growing Secular Risks Present: The ongoing secular threats
presented by changing
media consumption, emerging distribution platforms and
technology evolution and
adoption have had a negative effect on Viacom's operating
recognizes the risks inherent in the company's strategies to
address the secular
threats and adapt to changing industry dynamics, monetize
habits, and recapture a target audience that continues to shift
viewing media in a linear, measured environment.
Advertising Revenue Exposure Highlights Risks: Rating concerns
to cyclical advertising revenues (at 37% of revenues, moderate
relative to peer
group) and the company's capacity to adapt to ever-changing
patterns and technology platforms. Fitch's ratings recognize the
within Viacom's operating profile given the exposure to cyclical
revenues and the hit-driven nature of its cable networks and
however, there is minimal tolerance within the current ratings
weakening of Viacom's operating profile.
Fitch's key assumptions within the rating case include:
--Media Networks: Flat revenues in 2017 approaching low
single-digit growth in
the years following.
--Filmed Entertainment: Low- to mid-single-digit growth.
--Near-term EBITDA margin pressure in both Media Networks and
--Dividend remains at half of FY 2016 for the ratings horizon.
--Share buyback activity remains suspended.
--Fiscal 2017 borrowings include $1.4 billion senior unsecured
issuance and proceeds from junior subordinated debentures.
--Fiscal 2017 debt repayments include 2017, 2018 maturities.
--Leverage under 3.5x by FYE 2018 approaching 3x by 2019.
Positive: Upward ratings momentum is unlikely during the current
given Viacom's persistent weak operating performance and the
on its business model.
Negative: Fitch notes that gross leverage was high at 4.2x for
the TTM period
ending Dec. 31, 2016. While the proposed junior subordinated
slightly reduce leverage, Fitch expects pro forma leverage will
above our 3.5x threshold level, weakly positioning the company
in the 'BBB'
rating category. Fitch recognizes the company's planned
however Fitch would consider a negative rating action if
reduction or improved operating trends fail to bring gross
leverage down to
levels which Fitch views as more consistent with the 'BBB'
Failure to gain traction from the turnaround strategy,
particularly in regard to
ratings and advertising momentum at Media Networks, could also
negative pressure on the ratings, notwithstanding the company's
more conservative fiscal policies.
Viacom's weakening operating profile is diminishing its
In step with the company's weakened operating results, FCF
and FCF leverage metrics have also deteriorated. Led by its
segment, the company generated approximately $903 million of FCF
cash flow from operations less capital expenditures and
dividends) during the
LTM period ended Dec. 31, 2016, reflecting a 44% decline
relative to company's
reported FCF generation during its fiscal year end 2015. Fitch
expects that the
estimated $1 billion cash investment in Paramount by Chinese
which will fund 25% of Paramount's film slate costs over the
next three years
will provide some upside to operating cash flow over the ratings
However, operational headwinds, higher cash taxes along with
costs are expected to continue hindering FCF generation through
Fitch expects FCF generation after dividends during fiscal 2017
roughly $900 million.
In Fitch's view, Viacom's liquidity is adequate and supported by
generation. Additional financial flexibility is provided by the
billion revolving credit facility (fully available as of Dec.
31, 2016 and there
was no outstanding commercial paper) and $443 million of cash on
hand as of Dec.
31, 2016. Viacom has deemed substantially all of the cash held
by its foreign
subsidiaries as permanently reinvested in its foreign operations
and does not
intend or foresee a need to repatriate any of this cash.
Viacom's revolver expire on Nov. 18, 2019. The credit facility
interest coverage covenant requiring coverage for the most
recent LTM period to
be at least 3x.
FULL LIST OF RATING ACTIONS
Fitch assigns the following ratings:
--Junior subordinated debentures 'BB+'
Fitch currently rates Viacom as follows:
--Long-Term IDR 'BBB';
--Senior unsecured notes and debentures 'BBB';
--Senior unsecured bank facility due 2019 'BBB';
--Short-Term IDR 'F2';
The Rating Outlook remains Negative.
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908
Date of Relevant Rating Committee: Feb. 16, 2017
Summary of Financial Statement Adjustments - Financial statement
that depart materially from those contained in the published
statements of the relevant rated entity or obligor are disclosed
--No material adjustments have been made that have not been
disclosed in public
fillings of this issuer.
Additional information is available at www.fitchratings.com
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
Recovery Ratings and Notching Criteria for Non-Financial
Corporate Issuers (pub.
21 Nov 2016)
Treatment and Notching of Hybrids in Non-Financial Corporate and
Analysis (pub. 29 Feb 2016)
Dodd-Frank Rating Information Disclosure Form
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