June 26, 2017 / 5:42 PM / 6 months ago

Fitch Rates CBS' Senior Unsecured Note Offering 'BBB'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, June 26 (Fitch) Fitch Ratings has assigned a 'BBB' rating to CBS Corporation's (CBS) proposed offering of five-year and 10-year senior unsecured notes. The Rating Outlook is Stable. The proceeds of the offering are expected to be used for general corporate purposes including the repayment of outstanding debt. Fitch currently rates CBS's Issuer Default Rating (IDR) 'BBB'. Approximately $9 billion of debt was outstanding as of March 31, 2017, including $30 million of commercial paper (CP). A full list of ratings follows at the end of this release. CBS's capital structure and credit protection metrics remain within Fitch's expectation for the current rating. Gross leverage approximated 2.8x as of the latest 12-month (LTM) period ended March 31, 2017, relatively flat from year-end 2016 and consistent with our expectation that leverage would trend higher owing to the exclusion of the radio segment cash flows (split-off expected to be completed in second half of 2017) and increased shareholder repatriation in 2016. While CBS is maintaining leverage levels close to Fitch's 3x gross leverage target for the current ratings, Fitch believes that the company's solid execution of increasing non-advertising revenue sources, including content licensing, distribution and retransmission revenues, provides the company greater financial flexibility at the current 'BBB' rating level. KEY RATING DRIVERS Outside of investing in its core businesses and growth initiatives, share repurchases continue to be the centerpiece of CBS's capital allocation strategy. Shareholder returns that exceed free cash flow (FCF) generation are incorporated into the current ratings to the extent that leverage remains roughly in-line with Fitch's 3x total leverage threshold. Strong Portfolio of Content Assets: CBS benefits from its strong portfolio of content assets including the CBS Television Network, Showtime Networks and CBS Sports Network. The company is consistently a producer of highly desirable primetime content as evidenced by the CBS Television Network's No.1 position in terms of primetime viewership for the last nine consecutive years. The positioning allows CBS to effectively monetize its programming into advertising revenues, growing retransmission and reverse retransmission revenues, syndication revenues, and over-the-top (OTT) and subscription video on demand (SVOD) revenues. Improved Revenue Mix: Growing content licensing and distribution, affiliate and subscription revenues are improving CBS's revenue mix and are in line with the company's long-term objective to increase non-advertising revenue sources. However, CBS's exposure to advertising revenues at 45% excluding CBS Radio is relatively high compared to other diversified media companies. Growing and Stable Retransmission Revenues: CBS's retransmission consent/reverse compensation revenue surpassed $1 billion in FY 2016 (a full year ahead of schedule) and is expected to grow to $2.5 billion by 2020. This revenue stream provides a stable and recurring element to CBS's revenue base, which mitigates some of the volatility associated with advertising revenues. Additionally, the high margin characteristic of these revenues strengthens the company's operating profile. Executing on Revenue Growth Plan: Fitch believes CBS's plan to leverage its content-centric strategy and increase revenues by an incremental $3.75 billion through 2020 is reasonable. From Fitch's perspective CBS's core businesses are strong and position the company to successfully execute on its revenue growth initiatives. This anticipated revenue growth will serve to further diversify the company's revenue base and de-risk its business model. Exposure to Cyclical Advertising Revenues: Rating concerns include an above-average exposure to cyclical advertising revenue and the company's capacity to adapt to ever-changing media consumption patterns, emerging distribution platforms, and technology evolution - all of which will drive audience fragmentation and disrupt traditional media models. Additional concerns center on the company's ability to balance escalating programming expense and production costs with the requirement to consistently deliver programs that drive incremental share of an increasingly fragmented viewing audience while maintaining or expanding operating margins. DERIVATION SUMMARY CBS benefits from its strong portfolio of assets including the CBS Television Network, the Showtime Networks, and CBS Sports Network. Additionally, CBS benefits from its high proportion of originally produced content. The ratings reflect the progress the company has made in improving revenue mix by increasing the amount of recurring and more stable subscription revenues. While CBS has decreased the total proportion of revenues that stem from advertising revenues to 45% pro forma for the CBS Radio split-off, Fitch notes that this still remains high relative to peers. KEY ASSUMPTIONS --The base case assumes a stable economic and advertising environment. --Low- to mid-single-digit growth in CBS' Entertainment segment. Notably, CBS does not have the SuperBowl in 2017, which will impact top-line results. --Syndication revenues will continue to be variable and dependent on content availability. CBS is positioned to capitalize on its strong position in first-run syndication (15 of the top 20 syndication shows), a solid pipeline of content coming to off-network syndication and incremental demand for content from OTT and SVOD providers. --Cable Network segment revenue growth reflects the stability of the business and modest affiliation fee increases. The company's investment in original programming supports affiliation fee growth. Fitch anticipates mid-single-digit revenue growth. --Publishing revenues decline modestly in the base case reflecting the ongoing impact of digital migration. --Local Broadcasting segment again incorporates a stable economic and advertising environment as well as the typical political advertising cycle. Additionally, the segment will benefit from growing retransmission consent revenues. Year-over-year comparisons in 2017 are impacted by the planned split-off of CBS Radio and subsequent merger with Entercom which is anticipated to be completed in second-half 2017. --From a margin perspective, the base case assumes modest margin expansion within the Entertainment segment reflecting growth in higher-margin syndication and OTT and SVOD revenues. This is offset by higher content and programming costs. --Cable Network margins are pressured due to increasing programming costs due to higher investment in original programming although this is offset by benefits from new distribution windows. --Publishing margins increases modestly to reflect changing revenue mix to higher margin digital sales. --Local Broadcast margins move in tandem with the political cycle. --All debt is refinanced at maturity. Fitch expects free cash flow to continue to be dedicated to share repurchases. RATING SENSITIVITIES Positive rating action would likely coincide with CBS adopting a more conservative financial policy highlighted by a gross leverage target of 2.25x or lower. Moreover, Fitch needs to observe meaningful progress in CBS's efforts to transform its revenue mix and reduce its reliance on cyclical advertising revenues. Meanwhile, CBS will need to demonstrate that its operating profile can sustain itself amid ongoing competitive pressures, changing media consumption patterns and evolving technology platforms. Negative rating actions are more likely to coincide with discretionary actions of CBS management including, but not limited to, the company adopting a more aggressive financial strategy which increases leverage beyond 3x or event-driven merger and acquisition activity that drives leverage beyond 3.5x in the absence of a creditable deleveraging plan. Additionally, negative rating actions could result should Fitch begin to observe a negative impact from alternative content distribution platforms and other forms of entertainment that is significantly larger than our expectations. Other negative triggers include a weakening of the company's television studio's ability to produce desired television content, or secure programming on its television networks that consistently delivers viewing audience and related advertising revenues. LIQUIDITY The operating leverage inherent in CBS's business along with modest capital intensity enables the company to generate meaningful levels of FCF and provides the company with substantial financial flexibility. CBS generated approximately $732 million of FCF from continuing operations (defined as cash flow from continuing operations less capital expenditures and dividends), during the LTM period ended March 31, 2017, which follows $970 million of FCF generation during the year ended Dec. 31, 2016. Notably, CBS made a $100 million discretionary pension contribution in first quarter 2017 which weighed on FCF for the LTM period. Going forward, Fitch anticipates that the company will consistently generate consolidated FCF in excess of $1.2 billion providing CBS with adequate flexibility with in the current ratings to accommodate its capital allocation policy. CBS's liquidity position is strong and supported by $163 million of cash on hand as of March 31, 2017, $2.5 billion in available credit facilities (substantially all of which was available as of March 30, 2017, and expected FCF generation. CBS's revolver commitment expires on June 9, 2021. Scheduled maturities are well-laddered and manageable considering expected FCF generation, reliable market access and backup liquidity. Approximately 20% of the company's debt outstanding as of March 31, 2017 is scheduled to mature over the next five years, including $400 million in 2017, $300 million in 2018, $600 million in 2019, and $500 million in 2020. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings with a Stable Outlook: CBS Corporation (CBS) --Long-Term Issuer Default Rating (IDR) at 'BBB'; --Senior unsecured at 'BBB'; --Short-Term IDR at 'F2'; --Commercial Paper at 'F2'. CBS Broadcasting, Inc. --Long-Term IDR at 'BBB'; --Senior unsecured at 'BBB'. Contact: Primary Analyst Patrice Cucinello Director +1-212-908-0866 Fitch Ratings, Inc. 33 Whitehall Street New York, New York 10004 Secondary Analyst David Peterson Senior Director +1-312-368-3177 Committee Chairperson Jack Kranefuss Senior Director +1-212- 908-0791 Date of Relevant Rating Committee: July 28, 2016 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. 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