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Fitch Rates Discovery's Senior Unsecured Notes Offering 'BBB-'; Outlook Stable
February 28, 2017 / 5:42 PM / 9 months ago

Fitch Rates Discovery's Senior Unsecured Notes Offering 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, February 28 (Fitch) Fitch Ratings has assigned a 'BBB-' rating to Discovery Communications, LLC's (Discovery) issuance of senior notes due 2024. The rating on the proposed reopening of Discovery's existing 4.900% senior notes due 2026 is also 'BBB-'. The Rating Outlook remains Stable. Proceeds of both issuances are to be used to fund the company's tender offer for up to $600 million aggregate principal amount of Discovery's existing 5.05% senior notes due 2020 and 5.625% senior notes due 2019. Any remaining proceeds are expected to be used for general corporate purposes. A complete list of ratings follows at the end of this release. KEY RATING DRIVERS Leverage Target Availability: Fitch expects Discovery to remain within the company's stated target leverage of 3.25x-3.4x despite additional debt issuance above the debt tender to fund tender premiums. Discovery also remains well within the range for Fitch's 'BBB-' rating. Business Investment: Fitch expects Discovery to continue to focus on investing in programming for linear TV and content for alternative platforms domestically and internationally. While large-scale M&A activity is not anticipated given the dearth of cable network assets available, there is room at the 'BBB-' level to absorb some midsized acquisitions if Fitch believed the company had a credible plan to restore leverage to under 4x within a 12-month timeframe. Shareholder Returns Continue: Discovery has completed more than $7.7 billion of share repurchases from the program's inception in late 2010 through Dec. 31, 2016. Fitch believes Discovery's credit profile has sufficient flexibility to accommodate continued share repurchase activity at the current ratings. Debt incurrence to fund share repurchase activity is incorporated into the ratings up to Fitch's leverage threshold for Discovery's 'BBB-' rating. Solid Financial Flexibility: Discovery's solid FCF generation, strong credit protection metrics and minimal near-term scheduled maturities afford the company considerable financial flexibility at the current ratings. Fitch believes Discovery is positioned to generate annual FCF of $1.4 billion-$1.6 billion, given the company's high operating margins, global distribution platform, and low capital intensity associated with the cable programming business. Liquidity is supported by the $214 million of cash on hand as of Dec. 31, 2016 and $1.40 billion in aggregate availability under its $2 billion revolver, which expires in February 2021, and its $1 billion commercial paper program. Scheduled maturities are manageable with the next scheduled maturity not until 2019 when $500 million of senior unsecured notes are scheduled to mature. Rating Strengths: Discovery's ratings are supported by its strong core brands, particularly the Discovery Channel, TLC, and Animal Planet brands, all of which reach nearly 92 million U.S. subscribers, continue to generate solid ratings, and collectively generate 67% of domestic revenues. In addition, the ratings incorporate the revenue and growth prospects of the company's international business segment, global carriage, leverageable content, robust FCF and solid credit metrics. Ratings Concerns: Ratings concerns center on the significant contribution of cyclical advertising revenue, a competitive landscape for similar programming, the volatility associated with hit-driven content, and the company's dependence on the Discovery and TLC brands. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Low- to mid-single-digit top-line revenue growth driven by mid- to high-single-digit domestic affiliate fee growth and low-single-digit advertising growth; --EBITDA margin stabilization and slight expansion due to cost controls. Cost controls are offset by increase in programming and international content investment; --Annual FCF generation of approximately $1.4 billion to $1.5 billion; --Debt issuance to fund expected aggregate share buybacks and M&A activity in excess of annual FCF generation. RATING SENSITIVITIES Positive: An upgrade is unlikely over the medium term, given the company's stated willingness to operate at the top end of its leverage target and the limited depth of its brands. Factors considered for an upgrade include an explicit commitment from management and a compelling rationale for Discovery to operate at a more conservative leverage metric, and material viewership on new channel launches that will drive increased advertising and affiliate fees and enhance revenue diversity. Negative: Negative ratings pressure could result from a more aggressive financial policy with leverage exceeding Fitch's 4x threshold in the absence of a credible plan to return leverage below the threshold. Rating pressure could also result from meaningful customer defections to free viewing platforms or significant margin and FCF pressure from higher programming costs. LIQUIDITY As of Dec. 31, 2016, the company had solid liquidity consisting of $214 million of readily available cash, and $1.4 billion of availability under its $2 billion revolving credit facility due 2021. Discovery's liquidity position and overall financial flexibility are supported by FCF, which was approximately $1.26 billion for the year ended Dec. 31, 2016. Fitch expects pro forma FCF to range from $1.4 billion to $1.5 billion during the ratings horizon. FULL LIST OF RATING ACTIONS Fitch rates Discovery as follows: Discovery Communications, LLC --Long-Term Issuer Default Rating at 'BBB-'; --Short-Term IDR at 'F3'; --Senior unsecured revolving credit facility at 'BBB-'; --Senior unsecured notes at 'BBB-'; --Commercial paper at 'F3'. The Rating Outlook is Stable. Contact: Primary Analyst Jack Kranefuss Senior Director +1-212-908-0791 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Rachael Shanker Associate Director +1-212-908-0649 Committee Chairperson Alen Lin Senior Director +1-312-368-5471 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com; Hannah Huntly, London, Tel: +44 203 530 1777, Email: hannah.huntly@fitchratings.com. Date of Relevant Rating Committee: Dec. 15, 2016 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 filings of this issuer. 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