March 14, 2012 / 9:48 PM / 5 years ago

TEXT-S&P rates Getty Images term loan 'BB-'

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.

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