March 30, 2012 Research Update: U.K.-Based Broadcaster ITV Ratings Raised To 'BB+' On Significant Strengthening In Credit Metrics, Outlook Stable Primary Credit Analyst: Patrizia D'Amico, Milan (39) 02 72111 206;Patrizia_DAmico@standardandpoors.com Secondary Contact: Melvyn Cooke, Paris (33) 1-4420-6783;melvyn_cooke@standardandpoors.com Recovery Analyst: Marie-Aude Vialle, London (44) 20-7176-3655;Marie-Aude_Vialle@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Related Criteria And Research Ratings List www.standardandpoors.com/ratingsdirect 1
Research Update: U.K.-Based Broadcaster ITV Ratings Raised To 'BB+' On Significant Strengthening In Credit Overview U.K. broadcaster ITV PLC continued to strengthen its credit metrics in 2011, supported by a stable advertising environment and almost 340 million of debt reduction through bond buybacks. We are therefore raising our issuer and unsecured debt ratings on ITV to 'BB+' from 'BB'. The stable outlook reflects our view that ITV's credit measures will remain commensurate with the current rating even in a more challenging economic environment. Rating Action On March 30, 2012, Standard & Poor's Ratings Services raised to 'BB+' from 'BB' its long-term corporate credit rating on U.K. broadcaster ITV PLC. We affirmed the 'B' short-term corporate credit rating. At the same time, we raised to 'BB+' from 'BB' the issue rating on all of ITV's senior unsecured debt. The recovery rating on all ITV's bonds is unchanged at '3', indicating our expectation of meaningful (50%-70%) recovery for unsecured creditors in the event of a payment default. Rationale The rating action reflects ITV's improved credit metrics on the back of a stable U.K. TV advertising market in 2011 (up 0.7%), solid trend in non-advertising revenues (up 11%), and ongoing attention to cost discipline. The rating action also recognizes the company's "strong" liquidity, supported by a sizable cash balance, and ITV's significant effort to strengthen its balance sheet. Total revenues increased by 4% in 2011, mainly driven by the sound performance of the online, video on demand (VOD), and ITV Studio divisions. The group EBITA grew to 462 million, corresponding to a 21.6% margin, up from 19.8% reported in 2010, owing to top-line growth and further cost savings delivered in the year. As a result, ITV's leverage, as adjusted by Standard and Poor's, dropped to 2.3x in 2011 from 3.3x the previous year, which we consider quite modest for the rating category. Moreover, we factor into our rating action the company's prudent financial Standard & Poors RatingsDirect on the Global Credit Portal March 30, 2012 2
policy that led to 340 million of debt reduction and limited dividend payments aimed at retaining financial flexibility and strong liquidity. We expect that ITV will likely build up additional headroom at the current rating in 2012, given our base-case assumption of further growth in revenues and EBITDA, albeit at a moderate pace. Under our base-case scenario of low single-digit growth in the U.K. advertising market in 2012, we anticipate that ITV will report mid-single-digit growth in revenues and a stable EBITDA margin. We assume that revenue growth will stem primarily from non-advertising, while we anticipate flat advertising revenues at this stage given the uncertain economic outlook. As a result, we anticipate that leverage--as adjusted for operating leases, pension obligations, and 250 million of what we consider to be excess cash--will decline toward 2.0x by the end of 2012. Although we view the group's free operating cash flow (FOCF) as quite strong, we anticipate a decline in FOCF to debt to 20% in 2013 due to less favorable working capital changes and rising capital expenditures. The current ratings are supported by our view of ITV's moderate financial policy over the medium term. We anticipate that the group's dividend payments will only gradually increase over time, which would not jeopardize the group's financial flexibility. In addition, we factor only bolt-on acquisitions into our base-case scenario and we anticipate that sizable acquisitions would be funded with some of the available cash on balance sheet and with debt. We expect that even under a scenario of a sizable acquisition, ITV's Standard & Poor's-adjusted leverage would not exceed 2.5x and that ITV would continue to retain some financial flexibility. The current ratings reflect what we assess as ITV's "fair" business risk profile and "significant" financial risk profile, owing to its high exposure to the volatile U.K. TV advertising market. The ratings also reflect ITV's lack of business and geographic diversity. Tempering these factors, however, are ITV's leading position in the U.K. free-to-air TV market, its resilient cash generation capacity, and its strong liquidity position. Liquidity Our short-term rating on ITV is 'B'. We assess ITV's liquidity as "strong", according to our liquidity criteria. We expect the company's liquidity sources--including cash, funds from operations (FFO), and credit facility availability--to exceed uses by more than 1.5x over the next 24 months, even in the event of a sharp decline in EBITDA. Liquidity sources for the next 12 months mainly include a nominal cash balance of 801 million as of year-end 2011. We understand, however, that about 150 million of reported cash is restricted for financial leases and unfunded pension commitments, or is held overseas for working-capital purposes. Additionally, we anticipate that ITV will generate about 300 million of FFO in 2012. www.standardandpoors.com/ratingsdirect 3
The company's liquidity is also supported by a 125 million invoice-discounting facility, which was undrawn as of Dec. 31, 2011. This facility will fall due in September 2015. Liquidity uses for the next 12 months mainly include our conservative assumptions of 40 million in working-capital needs, 80 million of capital expenditures, and approximately 70 million of dividend payments. ITV has a favorable debt maturity schedule, supported by ongoing bond buybacks. Currently, the ITV's closest debt maturity is about 126 million in June 2014. The company's short-term debt is about 9 million and is related to finance leases. None of ITV's debt instruments have any financial covenants, either for maintenance or incurrence of additional debt. Recovery analysis The issue rating on ITV's various unsecured notes is 'BB+', in line with the corporate credit rating. The recovery rating of '3' reflects our expectation of meaningful (50%-70%) recovery for creditors in the event of a payment default. While the nominal calculated recovery is higher than the indicated threshold, our criteria relating to unsecured debt caps the recovery rating at '3'. Our issue and recovery ratings are supported by our valuation of ITV as a going concern in a default scenario, given the strength of its brand, licenses, programming rights, market share, and industry knowledge and experience, which we believe could retain some value at default. On the other hand, the recovery rating is limited by the unsecured nature of the notes. In order to determine recoveries, we simulate a payment default. We believe that the key risks that ITV faces relate to its high dependency on advertising revenues, which could be severely diminished in a prolonged tough economic environment. Our hypothetical default scenario also assumes the cash currently sitting on the balance sheet would be substantially reduced as a result of a more aggressive financial policy, including a combination of increased shareholder returns and acquisitions. When combined with ITV's operating leverage, we believe that these operating risks would trigger a hypothetical default in 2017, which corresponds to the maturity year of the 250 million 7.375% senior unsecured notes. Our going-concern valuation yields a stressed enterprise value of approximately 780 million, which is equivalent to 5.75x EBITDA, assuming that EBITDA declines to approximately 135 million by the time of default, and also assuming limited value from acquisitions made in our default scenario. In order to determine recoveries, we deduct from the enterprise value priority liabilities comprising enforcement costs, 50% of the net pension deficit, Standard & Poors RatingsDirect on the Global Credit Portal March 30, 2012 4
related prepetition interest, and a fully drawn invoice-discounting bank facility, which we assume would have been extended or refinanced. On this basis, we see sufficient value for recovery exceeding the 50%-70% range for the noteholders. However, since the rating is capped, this translates into a recovery rating of '3'. Outlook The stable outlook reflects our view that ITV's credit metrics will likely remain commensurate with the current ratings, based on low single-digit growth in its revenues and stable EBITDA margin. The stable outlook assumes that ITV will retain financial flexibility through a moderate financial policy on acquisitions and shareholder remuneration. We view a ratio of adjusted debt to EBITDA of about 2.5x and an adjusted ratio of FOCF to debt in excess of 10% on a sustainable basis as adequate for the current rating. We could raise the rating if ITV continues to reduce its dependence from advertising, leading us to revise ITV's business risk profile to "satisfactory". Rating upside could also stem from stronger advertising market growth than we currently anticipate, such as an increase in mid-single-digit revenues and a 24% EBITDA margin. In turn, this further assumes a resulting adjusted debt-to-ebitda ratio of less than 2.0x on a sustainable basis alongside a commitment from management to keep financial metrics at that level. We could lower the rating if ITV's adjusted debt to EBITDA were to rise above 3.0x on a sustainable basis. We could see this happening as a result of unexpected operating setbacks (such as a more than 3.0% decline in revenues and 16% EBITDA margin) or larger shareholder remuneration or acquisitions. Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated. Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009 2009 Key Credit Factors: Criteria For Rating The Television And Radio Broadcasting Industry, Dec. 11, 2009 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Standard & Poor s Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 www.standardandpoors.com/ratingsdirect 5
Ratings List Upgraded; Ratings Affirmed To From ITV PLC Corporate Credit Rating BB+/Stable/B BB/Stable/B Senior Unsecured* BB+ BB Recovery Rating 3 3 *Guaranteed by Carlton Communications Ltd. Carlton Communications Ltd. Corporate Credit Rating BB+/Stable/B BB/Stable/B Additional Contact: Industrial Ratings Europe;CorporateFinanceEurope@standardandpoors.com Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. Standard & Poors RatingsDirect on the Global Credit Portal March 30, 2012 6
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