Fitch Rates Viacom's Note Offering 'BBB+'
CHICAGO -- March 12, 2013
Fitch Ratings has assigned a 'BBB+' rating to Viacom Inc.'s (Viacom) $550
million issuance of 10- and 30-year senior notes. Fitch currently has a 'BBB+'
Issuer Default Rating (IDR) for Viacom. The Rating Outlook is Stable.
The notes will be issued under Viacom's existing indenture (dated April 12,
2006, as periodically supplemented) and will be pari passu with all existing
debt. The notes include a change of control put offer of 101% upon a change of
control and subsequent downgrade of the notes to non-investment grade. A
change of control includes sale of all or substantially all the assets of the
company, a majority of directors of the board cease to be continuing
directors, any person/entity other than Redstone Family Members acquiring 50%
or more of the voting control of the company, or the consummation of a going
private/Rule 13-3 transaction. The proceeds from the new debt issuance will be
used for general corporate purposes, including share repurchases.
Viacom repurchased $2.8 billion of common stock in the latest 12 months (LTM)
as of Dec. 31 2012. The company indicated that intends to repurchase another
$2.5 billion in fiscal 2013 (fiscal first quarter share repurchases totaled
$700 million). As of Jan. 30, 2013, the company had $3.85 billion remaining on
its $10 billion stock repurchase program. The company's Dec. 31, 2012 LTM free
cash flow generation (less dividends) was $1.6 billion. Shareholder returns
that exceed free cash flow generation are incorporated into current ratings,
to the extent that leverage remains below Fitch's 2.25x total leverage target.
Viacom's leverage target remains 2.0x. Fitch calculates Viacom's leverage at
2.1x at Dec. 31, 2012, 2.2x pro forma for new issuance. Further, Viacom does
not have any sizeable term debt maturities until 2014 when $600 million of
unsecured notes come due.
KEY RATING DRIVERS
The ratings are underpinned by the strength in the Media Networks segment,
highlighted by its dual revenue stream, low capital intensity and high free
cash flow conversion. A level of ratings volatility at any given network is
factored into the ratings.
Fitch continues to believe that over-the-top (OTT), or Internet-based,
television content will not have a material negative impact on Viacom's credit
profile or free cash flow over the intermediate term. Further, in Fitch's
opinion, the proliferation of new OTT entrants and methods of consumption will
continue to drive more demand for Viacom's content. Fitch believes the
uncertainty around the continued ability of cable networks to pass increased
programming costs onto the distributors poses moderate risk to cable network
providers over the longer term. Mitigants for Viacom include Fitch's belief
that the top tier channels will retain leverage with distributors going
forward, as well as the low-cost nature of much of its programming.
Viacom's ratings continue to be supported by its:
--Strong cash generating ability, led by the operating dynamics of its core
--Overall global prominence of its brands;
--Leading positions in numerous attractive demographics; and
--Solid carriage positions with the multiple service operators (MSOs).
Ratings concerns include:
--Viacom's exposure to cyclical advertising;
--An increasingly fragmented landscape for some of the company's key targeted
--Secular challenges related to audience fragmentation and time-shifting; and
--The inherent volatility of the movie business.
Viacom's liquidity at Dec. 31, 2012 consisted of $671 million of cash and $2.5
billion available under the undrawn RCF. Liquidity is further bolstered by the
aforementioned strong free cash flow. This solid liquidity position provides
substantial flexibility, particularly in light of the manageable maturity
Total debt, including new issuance, is $8.9 billion and consists primarily of
1) $600 million of senior notes due September 2014; 2) $850 million of senior
notes due 2015; 3) $1.3 billion of senior notes due 2016; 4) $6 billion of
senior notes and debentures due 2017-2043; and 5) $224 million of capital
leases and other obligations with various upcoming maturities.
Positive: Fitch recognizes that the credit profile is strong for the rating
category given the underlying business. Over time, it is possible that Fitch
could consider the company for an upgrade at the same financial policy if
Fitch derives incremental comfort with the cable networks' audience
sustainability amid proliferating alternatives. Fitch also wants to see a
long-term demonstrated track record of operating at the new leverage target
amid a sustained benign operating environment.
Negative: Rating pressures could occur if Viacom indicates it will operate
with a more aggressive financial policy, with leverage above Fitch's 2.25x
target for a sustained period of time. A downgrade could also occur if current
secular challenges or material weakness in network ratings drive sustained
revenue and EBITDA deterioration.
Fitch currently rates Viacom as follows:
--Long-term IDR at 'BBB+';
--Senior unsecured notes and debentures at 'BBB+';
--Senior unsecured bank facility due 2017 at 'BBB+';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 9, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
Short-Term Ratings Criteria for Non-Financial Corporates
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David Peterson, +1-312-368-3177
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Rolando Larrondo, +1-212-908-9189
Mike Simonton, CFA, +1-312-368-3138
Brian Bertsch, New York, +1 212-908-0549
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