Fitch Affirms Viacom's IDR at 'BBB+'; Outlook Stable
CHICAGO -- May 6, 2013
Fitch Ratings has affirmed Viacom, Inc.'s (Viacom) Issuer Default Rating (IDR)
and senior unsecured debt ratings at 'BBB+'. A full list of rating actions
follows at the end of this release.
The Rating Outlook is Stable. Approximately $8.9 billion of debt outstanding
as of March 31, 2013 is affected by Fitch's action.
KEY RATING DRIVERS
--Viacom's portfolio of cable networks and leading global brands underpin the
--The ratings incorporate Viacom's capital allocation strategy that favors
--Sufficient capacity exists within the current ratings to accommodate the
company's modest upward revision to its leverage target.
Fitch's ratings on Viacom are based on the strong market position and cash
flow generating ability of the company's core cable networks. The operating
dynamics of these businesses, highlighted by a high-margin, recurring
dual-stream revenue base and low capital intensity, positions them to produce
stable operating margins and high degree of free cash flow conversion.
Viacom's cable networks benefit from long-term affiliation contracts with
multi-channel video programming distributors (MVPDs) and extensive
distribution of its leading networks. Viacom's Media Networks business sector
derives approximately 94% of the company's segment EBITDA generation (based on
the LTM period ending March 31, 2013). Fitch expects mid-single -digit top
line growth, stable margins and high free cash flow conversion within the
company's Media Networks segment over the ratings horizon, driven by domestic
affiliate fee growth and stable advertising markets.
Share repurchases continue to be the centerpiece of Viacom's capital
allocation strategy. The company intends to repurchase approximately $2.8
billion of its common stock during fiscal 2013. The company had $3.3 billion
remaining on its $10 billion stock repurchase program as of March 31, 2013.
Viacom generated approximately $1.4 billion of free cash flow (FCF - defined
as cash flow from operations less capital expenditures and dividends) during
the LTM period ending March 31, 2013. Shareholder returns that exceed free
cash flow generation are incorporated into current ratings, to the extent that
leverage remains below Fitch's 2.5x total leverage target.
Viacom revised upward its leverage target to range between 2x to 2.25x. Fitch
believes that there is sufficient capacity within the recommended ratings to
accommodate the company's modest revision to its leverage target. Viacom's
leverage target remains within Fitch's 2.5x leverage threshold for the current
rating. Total debt outstanding as of March 31, 2013 was approximately $8.9
billion, reflecting a 9.6% increase relative to fiscal year-end 2012 (Sept.
30, 2012). Consolidated leverage of 2.26x as of the LTM period ended March 31,
2013 marks an increase from 1.9x as of fiscal year-end 2012 and 1.8x as of
March 31, 2012. The increased leverage is in line with the company's financial
strategy to increase leverage to its target 2.25x and use the proceeds
generated from the higher leverage to repurchase stock. Fitch anticipates that
the company will continue managing its capital structure in a manner
consistent with the current ratings and for leverage to decline modestly (in
the absence of further issuance) to 2.1x by the end of the company's fiscal
Overall, Fitch's ratings incorporate Viacom's strong and consistent free cash
flow (FCF - defined as cash flow from operations less capital expenditures and
dividends), high level of financial flexibility, solid credit protection
metrics, sound liquidity and leading market positions within its core
businesses in numerous attractive demographics. A level of ratings volatility
at any given network is factored into the ratings.
Rating concerns center on the company's ability to adapt to changing media
consumption patterns and technology platforms as well as its capacity to
deliver programming to its cable networks that drive incremental share of an
increasingly fragmented viewing audience. Additional ratings considerations
include Viacom's exposure to cyclical advertising revenues (moderate relative
to peer group) and the inherent volatility of the company's Filmed
Entertainment business segment.
Fitch continues to believe that Viacom is well positioned to address the
threats and opportunities presented by emerging alternative distribution
platforms. The evolving media landscape including the growing prominence of
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.
In Fitch's view, Viacom's liquidity is strong and supported by expected free
cash flow generation. Additional financial flexibility is provided by the
company's $2.5 billion revolving credit facility (all of which was available
for borrowing as of March 31, 2013) and $1.26 billion of cash on hand as of
March 31, 2013. Commitments under Viacom's revolver expire on Nov. 9, 2017.
Approximately 40% of the company's debt outstanding on March 31, 2013 is
scheduled to mature over the next five years including $600 million in 2014
and $850 million in 2015. However, the maturities are well laddered and
manageable considering expected free cash flow generation, reliable market
access and back-up liquidity.
Positive rating action would likely coincide with Viacom adopting a more
conservative financial policy highlighted with a gross leverage target of 2x
or lower. Meanwhile Viacom 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 discretional actions
of Viacom's management including, but not limited to, the company adopting a
more aggressive financial strategy or event driven merger and acquisition
activity, that drive leverage beyond 2.5x in the absence of a creditable
de-leveraging 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
Fitch's expectations or a material weakness in network ratings drive sustained
revenue and EBITDA deterioration.
Fitch affirms Viacom's ratings 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'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
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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 Weaver, +1 312-368-3186
Brian Bertsch, +1 212-908-0549
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