March 14 - Overview -- U.S.-based image distributor Getty Images is proposing to issue a new $275 million first-lien incremental term loan due 2015 and to use the proceeds to fund a portion of a special dividend. -- We are assigning the incremental term loan our 'BB-' issue level rating with a recovery rating of '4'. At the same time, we are affirming our 'BB-'corporate credit rating on the company. The outlook is stable. -- The stable outlook incorporates our expectations that operating performance will remain steady, that liquidity will remain adequate, and that leverage will not rise beyond 5x. Rating Action On March 14, 2012, Standard & Poor's Ratings Services assigned Seattle, Wash.-based Getty Images Inc.'s proposed $275 million incremental term loan due 2015 its issue-level rating of 'BB-' (at the same level as our 'BB-' corporate credit rating on the company). The recovery rating on this debt is '4', indicating our expectation of average (30%-50%) recovery for lenders in the event of a payment default. The company plans to use proceeds, along with $115 million of cash, to fund a distribution of about $379 million to its shareholders. In addition, we affirmed our corporate credit rating on Getty at 'BB-'. The rating outlook is stable. Rationale The 'BB-' rating on Getty reflects our expectation that its financial profile will remain "aggressive" (based on our criteria) because of its private-equity ownership and substantial leverage. We regard Getty's business profile as "fair" because of its leading market position. This is tempered by our expectation that unfavorable secular trends related to digital migration will continue to put some pressure on the company's traditional business. We expect Getty's business to remain cyclical. We expect operating performance to be stable, but over the near term, we anticipate minimal revenue and EBITDA growth because of organic revenue declines in the fourth quarter and the potential for growth in iStockphoto to slow. Getty has a leading position as a global provider of preshot still and moving visual content. Its business relies on sales to the cyclical advertising and publishing industries. Structural shifts in marketing, to moving advertising online from print media, affect Getty's average price per image. Images for online use require small, lower-resolution files, which command lower prices than images for print media; however, the volume of online usage exceeds that of print. Getty has mitigated some of these pressures by exploring alternative licensing models, including value-priced and low-cost licensing, subscription-based package licensing, expansion into editorial photography (used in news, sports, and entertainment), and music licensing for commercial use. Under our base-case scenario, we expect Getty's 2012 revenue and EBITDA to be flat or grow at a low-single-digit percentage pace given our expectation of low-single-digit U.S. GDP growth, muted by unfavorable exchange rate movements . In addition, we believe that growth in the company's low-priced licensing business, iStockphoto, may slow as this business begins to mature and may be facing competition from very low-priced image options. We believe that the company's EBITDA margin will benefit from recent cost reductions in 2012, and expect the EBITDA margin to remain healthy at over 35% over the near term. Based on preliminary, unaudited financial statements, for the three months ended Dec. 31, 2011, Getty's revenue decreased 0.7% on a currency neutral basis and 0.2% on a reported basis. For the same period, EBITDA (which differs from the company's EBITDA used for covenant purposes and from its "management" EBITDA) increased 6%, primarily due to lower restructuring expenses and an increase in its gross margin. We estimate that organic, currency-neutral revenue declined at a low-single-digit percentage rate in the quarter. We believe that this was due to Getty's end customers reducing advertising spending in the quarter as a result of economic uncertainty, as well as slowing growth in iStockphoto. Management has stated that declining revenue trends in traditional creative stills have stabilized. The EBITDA margin was 35.6% for the year ended Dec. 31, 2011, an improvement from the same period last year, when it was 33.2%. EBITDA margin improvement for the full year stemmed from gross margin improvement and higher e-commerce growth, which resulted in lower sales and marketing expenditures, and other cost-reductions. Pro forma for the transaction, lease-adjusted total debt to EBITDA was 4.5x. Pro forma lease-adjusted leverage was in line with the 4x to 5x debt-to-EBITDA range that we associate with an aggressive financial profile under our criteria. Additionally, we view Getty's financial policy as aggressive because if this transaction is completed, the company will have funded two special dividends to its owners over the last 18 months with additional debt. Based on preliminary, unaudited financial statements, the company converted 51.5% of its EBITDA to discretionary cash flow for the 2011 year-end. The company's higher interest burden will slightly reduce discretionary cash flow, but we anticipate that Getty will continue to generate healthy discretionary cash flow levels. We estimate that adjusted EBITDA coverage of interest will be above 3.5x over the near term, while we expect the company's conversion of EBITDA to discretionary cash flow to be in the 40% range. Given the company's discretionary cash flow generation, credit metrics could improve in 2012, absent debt-financed acquisitions or additional dividend payments. While leverage may temporarily decline in this case, we believe long-term leverage will be high because of Getty's private equity ownership and history of debt-financed dividends. Liquidity We believe Getty has "adequate" liquidity (as per our criteria) to cover needs over the next 12 months. Our assessment of its liquidity profile incorporates the following expectations and assumptions: -- Sources of liquidity over the next 12 months will exceed uses by 1.2x or more; -- Sources would exceed uses even with an unforeseen 15% EBITDA decline over the next 12 months; -- We expect that under the amended credit agreement, Getty would maintain covenant compliance, even with a 15% decrease in EBITDA; -- The company, in our view, could absorb low-probability, high-impact adversities; and -- Getty has good relationships with its banks. Liquidity sources include pro forma cash and cash equivalents of $35 million at Dec. 31, 2011, our expectation of moderate positive discretionary cash flow in 2012, and a $100 million revolving credit facility. Getty has modest debt maturities over the next few years. The company's existing term loan amortizes at roughly 1% annually. The new term loan will amortize at 1.25% per quarter for the first four quarters, 2.50% per quarter for the following four quarters, and 3.125% for the following six quarters, with the balance due at maturity. We expect this will be manageable using discretionary cash flow. The incremental term loan matures in November 2015. We expect that Getty will amend its existing credit agreement as part of the proposed transaction, providing the company with an adequate margin of compliance with financial covenants over the near term. Recovery analysis See Standard & Poor's recovery report on Getty Images, to be published on RatingsDirect as soon as possible following the release of this report. Outlook Our rating outlook on Getty is stable. We could consider lowering the rating if lease-adjusted leverage increases or if we conclude that compliance with financial covenants could fall below 15%. This could occur if the company adopts an even more aggressive financial policy of shareholder returns, if competitive pressure leads to significant margin deterioration, or if EBITDA declines as a result of secular or cyclical pressure. Specifically, we could lower our rating if adjusted leverage approaches 5.0x, which could be because of additional debt-financed dividends, if growth outside of the traditional stills business does not offset an accelerated decline in this segment, if competitive pressures intensify, or if weakness in the global economy increases. Although less likely, we could raise the rating if the company adopts a more conservative financial policy while maintaining its competitive position. Related Criteria And Research -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 Ratings List Ratings Affirmed Getty Images Inc. Corporate Credit Rating BB-/Stable/-- Senior Secured BB- Recovery Rating 4 New Rating Getty Images Inc. $275M 1st-lien incremental term ln due 2015 BB- Recovery Rating 4 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.