Carlyle Group’s Getty Images Ratings on Review for Cut by Moody’s
Ratings on Getty Images Inc.’s debt were placed on review for a possible cut by Moody’s Investors Service because of weaker-than-expected results from the photo archive controlled by Carlyle Group LP.
The company’s rising debt compared with earnings before interest, taxes, depreciation and amortization, as well as reduced income from its division that sells photographs to websites led to the review, according to a statement yesterday from the ratings company. Second-quarter revenue is estimated to have fallen to $226 million from $234 million a year earlier, Moody’s said.
Moody’s review comes less than a year after Getty Images took on almost $2.6 billion in debt to finance Carlyle Group’s $3.3 billion buyout of the company from Hellman & Friedman LLC. The company’s midstock business, which sells photographs to websites and smaller businesses, has been challenged by competitors like Shutterstock Inc. (SSTK) and Fotolia LLC, according to Moody’s analyst Carl Salas.
“The company is falling short of expectations laid out for 2013,” Salas, who is based in New York, said in a telephone interview. “Moody’s view is that it will be challenged to make the expected revenue and Ebitda levels.”
Revenue for the 12 months ended in June dropped to $897 million at Getty, which is about 51 percent owned by Carlyle and the remainder by a trust representing Getty family members, according to Moody’s. Revenue was about $907 million for the 12 months ending March 31, according to a May 14 Moody’s report.
Getty’s approximately $1.9 billion term loan, used to finance its buyout, fell 4 percent last month to as low as 95.06 cents on the dollar on Aug. 22, according to data compiled by Bloomberg. It started the month of August at 100.38 cents. The debt was quoted today at 96.63 cents.
The company’s $550 million of 7 percent notes due October 2020 were quoted today at 89.19 cents, up from 87.06 cents on Aug. 20, Bloomberg data show. Getty also got a $150 million revolving credit line for the purchase.
Randall Whitestone, a Carlyle spokesman, declined to comment and referred questions to the company. Jodi Einhorn, a Getty spokeswoman, didn’t return a telephone call seeking comment on the Moody’s action.
One third of Getty’s revenue comes from its midstock business and another third from its premium stills group, where it sells high-resolution photos to larger companies and advertising firms for $300 or more per picture, according to Salas. About 25 percent of the business is editorial stills, including images sold to newspapers or magazines.
Revenue for Getty’s midstock business was down 9 percent for the three months ended in June, compared with the same time period ended June 2012, according to Moody’s. Its high-end and editorial businesses were unchanged to growing.
Contributing to the decline in the midstock business has been increased competition from Shutterstock, which completed an initial public offering in 2012, and from Fotolia, which KKR & Co. (KKR) invested in last year.
“Getty is a leader in the field and these other companies are newer to the business, but are going through high growth because they are focusing on the microstock segment,” Salas said.
Shutterstock sold 4.5 million shares at $17 apiece in its initial 2012 offering, the New York-based company said in an Oct. 10 news release. The stock has more than doubled as of yesterday.
KKR announced a $150 million growth equity investment in New York-based Fotolia in May 2012. In addition, KKR and TA Associates worked with management to put in place a $150 million financing, according to a May 16, 2012 news release.
Moody’s revised forecasts for the next 12 months indicate Getty will need more time than initially anticipated to stabilize revenues and restore operating margins, and bring financial performance in line with plans the company presented when the debt was rated for the October 2012 Carlyle buyout.
“The plan they discussed at the beginning of the year, indicated a decline but by the end of the year, the beginning of 2014, there would be a restoration of margin and the declines would decelerate,” Salas said. “Now Moody’s believes the potential is greater that the trend line will continue and you will still see a decline, and it’s going to take longer to be fixed.”
Leverage at Getty was about six times when Carlyle bought the company in 2012 and rose to about 7.1 times as of June 30, according to Moody’s. Leverage increased to 3.2 times in 2008 from less than 1.5 times when Hellman & Friedman purchased the company, according to Moody’s. Leverage increased during Hellman & Friedman’s ownership after a 2010 dividend.
“We believe long-term leverage will be high because of Getty’s private-equity ownership, history of special dividends and aggressive financial policy,” Standard & Poor’s analysts wrote in a March 26 news release.
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