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Fitch Rates CBS's Senior Unsecured Note Offering 'BBB'; Outlook Stable
November 13, 2017 / 5:59 PM / 9 days ago

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

(The following statement was released by the rating agency) NEW YORK, November 13 (Fitch) Fitch Ratings has assigned a 'BBB' rating to CBS Corporation's (CBS) proposed offering of five- (2023) and ten-year (2028) senior unsecured notes. The Rating Outlook is Stable. The proceeds of the offering are expected to be used for general corporate purposes including the discretionary funding of the company's qualified defined benefit plans and repayment of outstanding debt. Fitch currently rates CBS's Issuer Default Rating (IDR) 'BBB'. Approximately $9.7 billion of debt was outstanding as of Sept. 31, 2017, including $590 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 3.1x as of the latest 12-month (LTM) period ended Sept. 30, 2017, up slightly from 2.9x at 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 fourth quarter 2017) and increased shareholder returns in 2016, including dividends and share repurchases. While CBS is maintaining leverage levels close to Fitch's 3.25x gross leverage target for the current ratings, Fitch believes that the company's growth in non-advertising revenue sources, including content licensing, distribution and retransmission revenues, provides the company greater financial flexibility at the current 'BBB' rating level. Additionally, Fitch incorporates the expectation that CBS will continue to dedicate free cash flow towards share repurchases, but will do so prudently and within the parameters of Fitch's leverage threshold. Fitch views positively management's guidance for share repurchases in a more modest range of $800 million to $1 billion in FY 2018. KEY RATING DRIVERS Strong Portfolio of Content Assets: CBS benefits from its strong portfolio of content assets including the CBS Television Network, the 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 consent and reverse retransmission compensation 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 and reverse compensation revenues 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 The ratings reflect CBS' strong positioning of its programming assets relative to peers, including the broadcast CBS Television Network which was consistently been No. 1 in primetime ratings for the last nine years. The company has made progress in improving revenue mix by increasing the amount of recurring and more stable subscription revenues. However, while CBS has decreased the total proportion of revenues that stem from advertising revenues to 45% pro forma for the CBS Radio split-off, this still remains high relative to peers. Advertising revenue sources are among the most economically sensitive revenues within the media and entertainment sector. Additionally, television programming is subject to a high degree of hit-driven volatility. These risks are incorporated into CBS' existing ratings. KEY ASSUMPTIONS --The base case assumes a stable economic and advertising environment. --Low- to mid-single-digit growth in CBS' Entertainment segment. CBS did not televise the Super Bowl in 2017 and will not televise the Super Bowl in 2018, affecting 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 fourth quarter 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 2.5x or lower and 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 that increases leverage beyond 3.25x 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 substantial financial flexibility. CBS generated approximately $772 million of FCF from continuing operations, defined as cash flow from continuing operations less capex and dividends, during the LTM ended Sept. 30, 2017, following $970 million of FCF generation during year-end 2016. CBS made a $100 million discretionary pension contribution in 1Q17, weighing on FCF for the LTM ended Sept. 30, 2017. CBS expects to make a pension contribution of $500 million during 4Q'17, which will likely be funded in part by the company's November 2017 debt issuance. Fitch believes the company's planned pension contribution and its agreement to transfer $800 million of pension liabilities to an insurance company will reduce required contributions over the rating case. In the future Fitch anticipates the company will consistently generate consolidated FCF in excess of $1.2 billion providing CBS with adequate flexibility within the current ratings to accommodate its capital allocation policy. CBS's liquidity position is strong and supported by $144 million of cash on hand as of Sept. 30, 2017, $2.5 billion in available credit facilities, substantially all available as of Sept. 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 Sept. 30, 2017 is scheduled to mature over the next five years, including $600 million in 2019, $500 million in 2020 and $300 million in 2021 (including $590 million in commercial paper borrowings). FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings with a Stable Outlook: CBS Corporation --Long-Term 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 25, 2017 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --No material adjustments have been made that have not been disclosed in public fillings of this issuer. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. 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