Fitch Rates Discovery's Proposed Note Offering 'BBB'
NEW YORK -- March 12, 2013
Fitch Ratings has assigned a 'BBB' rating to Discovery Communications, LLC's
(Discovery) proposed offering of benchmark sized 10-and 30-year senior
unsecured notes. The Rating Outlook is Stable.
Proceeds from the offering are expected to be used for general corporate
purposes including funding acquisitions and share repurchases. The notes will
be guaranteed on a senior unsecured basis by Discovery Communications, Inc.
(Guarantor). As of Dec. 31, 2012, Discovery had approximately $5.2 billion of
KEY RATING DRIVERS:
--Issuance is in line with Fitch's expectations for the rating given the
company's cash requirements related to the pending acquisition of the SBS
Nordic operations from ProSiebenSat.1 Group for approximately $1.7 billion
--Discovery's leverage pro forma for the issuance was 2.9x as of Dec. 31, 2012
vs. actual leverage of 2.5x.
--Fitch expects leverage metrics will strengthen during the course of 2013.
--Discovery retains ample flexibility within the ratings for share repurchases
and moderate acquisition activity.
Discovery will issue the senior notes under the senior indenture dated Aug.
19, 2009. The notes will rank pari passu with Discovery's existing and future
unsecured and unsubordinated indebtedness. Similar to the existing bonds,
covenants are limited. There is a limitation on liens of up to 10% of the
Guarantor and its subsidiaries' total consolidated assets (in addition to
standard carveouts) and a change of control provision that is triggered if any
person becomes the beneficial owner of 50% or more of the voting stock of
Discovery or the Guarantor and the ratings on the newly issued notes are
downgraded below investment grade. Other change of control triggers include a
majority change in the Board of Directors, the dissolution of the Guarantor,
and/or if all or substantially all of Discovery's assets are sold, if any of
the aforementioned are followed by a downgrade below investment grade. Fitch
notes that there are cross default/cross acceleration provisions in regards to
debt in excess of $100 million.
Total debt outstanding as of Dec. 31, 2012 equated to $5.2 billion reflecting
a 24% increase relative to debt outstanding as of year-end 2011. Pro forma
leverage was 2.9x as of Dec. 31, 2012, and Fitch expects leverage will trend
down to 2.5x by the end of 2013. The company generated approximately $1
billion of FCF (defined as cash from operations less capital expenditures and
dividends) during 2012, which is similar to the FCF level in 2011. Fitch
believes the company's high operating margins and the low capital intensity
associated with the cable programming business positions Discovery to generate
annual FCF of approximately $1 billion.
Debt incurrence to fund share repurchase activity is incorporated into ratings
up to Fitch's 3.0x leverage threshold for Discovery's 'BBB' rating. Further,
while large-scale M&A activity is not anticipated given the dearth of cable
network assets available for sale, Fitch believes there is room at the 'BBB'
level to absorb some mid-sized acquisitions, underscored by Fitch's current
belief that the company would restore leverage to under 3.0x within a 12-month
Discovery's acquisition of ProSiebenSat.1 Group's SBS Nordic operations as
well as its 20% minority interest in TF1's Eurosport Group is incorporated
into Fitch's expectations for the rating. The transactions complement the
company's global footprint and are consistent with its strategy to grow and
improve the performance of international operations. The acquisition of the
SBS Nordic operations is not expected to generate any meaningful cost or
revenue synergies and does not present significant integration risk. The
transaction is expected to close during the first quarter of 2013.
Fitch believes Discovery's credit profile has sufficient flexibility, given
solid free cash flow (FCF), strong credit protection metrics for the ratings
category, and a minimal near-term maturity schedule, to accommodate continued
share repurchase activity at the current ratings. The share repurchase program
is consistent with Fitch's expectation for FCF to be directed towards share
repurchase and acquisitions. The company announced a $1 billion increase to
its existing share repurchase authorization and has approximately $1.5 billion
of capacity remaining. Fitch anticipates that share repurchases during 2013
will be substantially similar to 2012 levels.
Discovery's ratings are supported by the company's strong core brands, global
carriage, leverageable content, robust FCF and solid credit metrics. Ratings
concerns continue to center on the significant contribution of cyclical
advertising revenue, a competitive landscape of similar programming on other
cable channels, the general volatility associated with hit-driven content and
the company's dependence on the Discovery and TLC brands.
Fitch views Discovery's liquidity profile as solid, particularly given the
absence of maturities until $850 million comes due in 2015. The company's
liquidity position is further supported by the $1.2 billion of cash on hand as
of Dec. 31, 2012, and $1 billion available under the undrawn revolving credit
facility (RCF) maturing October 2017. Liquidity is further bolstered by annual
free cash flow that Fitch expects to approach $1 billion.
--An upgrade is unlikely over the medium term, given the company's stated
leverage targets and the limited depth of brands.
--Future upgrades would only be considered from the combination of the
following: 1) an explicit commitment from management and a compelling
rationale for Discovery to operate at a more conservative leverage metric and
2) material viewership on new channel launches that will drive increased
advertising and affiliate fees and enhance revenue diversity.
--Negative ratings pressure could result from a more aggressive financial
policy with more tolerance for leverage.
--Rating pressure could also result from meaningful customer defections to
free viewing platforms or significant margin and FCF pressure from higher
Fitch rates Discovery as follows:
--Senior unsecured bank facility 'BBB';
--Senior unsecured notes 'BBB'.
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).
Applicable Criteria and Related Research
Corporate Rating Methodology
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Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Mike Simonton, CFA
Brian Bertsch, +1-212-908-0549 (New York)
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