ITV Debt Gets Soccer Boost on England Victory: Corporate Finance

ITV Plc CEO Adam Crozier
Chief Executive Officer Adam Crozier has been restructuring ITV since his appointment in 2010, boosting online and digital projects after the company lost its high-grade status when advertising slumped amid the financial crisis in 2008. England’s Photographer: Denis Doyle/Bloomberg

ITV Plc may win back its investment-grade ranking as the U.K.’s biggest commercial broadcaster redeems debt and advertising revenue is boosted by the English soccer team’s success in the European Championship.

Credit-default swaps tied to the London-based company’s debt trade at levels implying an investment-grade rating of Baa3, one step above its current junk Ba1 grade, according to Moody’s Analytics. The company offered to buy back 250 million pounds ($392 million) of bonds this week by dipping into its 801 million-pound cash holdings, driving swaps down as much as 26 percent this week to 225 basis points.

Chief Executive Officer Adam Crozier has been restructuring ITV since his appointment in 2010, boosting online and digital projects after the company lost its high-grade status when advertising slumped amid the financial crisis in 2008. England’s win over Ukraine on June 19 attracted the biggest peak audience for any U.K. channel this year with 18.6 million viewers, according to research group BARB, and advertising revenue will increase as much as 17 percent this month because of the soccer tournament, ITV said May 9.

“The market has been expecting them to return to investment grade for a very long time, but as the management is fairly new they were still in the process of deciding their long-term strategy for their cash pile,” said Mark Chapman, a London-based technology, media and telecoms analyst at CreditSights Inc. “If England gets to the final, then there’s scope for more positive surprise.”

Debt Buybacks

The company bought back about 662 million pounds of loans and bonds in the past three years as part of a strategy to reduce debt and interest payments, ITV spokeswoman Mary Fagan said by e-mail June 20. She declined to comment on whether ITV are actively seeking an investment-grade rating.

ITV is now offering to redeem its most expensive and shortest-dated debt, the company said in a June 18 statement.

It said it will pay 117.5 cents on the euro for 188 million euros of 10 percent bonds due in 2014. It will also tender for parts of the outstanding 154 million pounds of 5.375 percent notes due 2015, and 250 million pounds of 2017 bonds at a minimum price of 104.25 pence and 108.25 pence on the pound respectively. The deadline for investors to reply to the tender is June 25.

Interest Charges

The buyback “makes the balance sheet more efficient by reducing interest charges by about 17 to 18 million pounds on a net basis,” Liberum Capital Ltd. media analyst Ian Whittaker wrote in a June 18 report. It also “increases the chances of a return to shareholders, probably in early 2013.”

ITV’s 2014 bonds climbed to 116.5 euro cents from 112.1 cents before the offer, and from 109.9 cents at the start of the year, Bloomberg Bond Trader prices show. Spreads on the notes plunged to 148 basis points more than similar-maturity government debt from 364 basis points on June 15 before the tender was announced.

The company had net debt of 921 million pounds, down from 1.3 billion pounds at the end of 2010, according to its 2011 results. It has a 200 million-pound term loan maturing in 2019 and the equivalent of 690 million pounds of senior unsecured bonds, Bloomberg data show.

The buyback will save the company about 8 to 10 million pounds in interest payments in 2013 resulting in a two percent increase in estimated earnings per share, UBS AG media company analyst Polo Tang wrote in a June 19 note.

England’s soccer team advanced from the group stages to the quarter-final of the tournament this week and will play Italy on June 24.

Advertising Boost

“ITV already gave guidance for a significant advertising boost in June, so England probably needed to get out of the group stage to hit what they’ve already promised,” CreditSight’s Chapman said. With the debt buyback “ITV have now ticked the credit metrics box, they just need to tick a few others to get the rating step-up. It’s within their power now.”

ITV has risen four percent to 75.2 pence since the tender, extending the stock’s gains to 10 percent this year and giving the company a market capitalization of 2.9 billion pounds.

Of the 27 analysts tracked by Bloomberg, ITV has 13 buy, seven hold and seven sell recommendations, with an average target price of 96.89 pence. That implies an upside of 29 percent.

Leverage Cut

Standard and Poor’s upgraded ITV to BB+ on March 30 with a stable outlook, and said in an April 27 report that it expects the company to have a leverage ratio of about two times debt to earnings before interest, tax, depreciation and amortization at year-end 2012, down from 2.3 times in 2011. CreditSights’s Chapman estimates that a successful buyback may cut gross leverage by about 0.5 times.

“We could raise the ratings if ITV continues to reduce its dependence on advertising,” S&P analysts led by Milan-based Patrizia D’Amico wrote in the report. “Rating upside could also stem from stronger advertising market growth than we currently anticipate.”

As credit-default swaps on ITV plummeted since the plan was announced, the Markit iTraxx Crossover Index of swaps, which includes the U.K. company, was 0.2 percent lower at 686 basis points.

The contracts typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals 1,000 euros annually on a contract protecting 10 million euros of debt.

ITV was created in its current form in 2004 through the merger of Carlton Communications Plc and Granada Plc. In 2000, Granada had bought United News & Media’s ITV television channels. ITV was initially shaped in 1955 as a network of regional stations to form a commercial rival to the publicly-funded British Broadcasting Corp.

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