AMC Networks (AMCX) Ratings Affirmed by S&P; Financial Risk Profile Revised to 'Significant'

Standard & Poor's Ratings Services said today that it affirmed its 'BB' corporate credit rating on AMC Networks Inc. (Nasdaq: AMCX). The rating outlook remains stable.

We revised our financial risk profile assessment on AMC Networks to "significant" from "aggressive." Our business risk profile assessment remains "satisfactory," based on the following factors:

• The company's dependence on a single cable network, AMC, as the largest individual network contributor to its revenue and cash flow;
• The company's four smaller domestic cable networks, which generate a smaller, but growing, proportion of revenue and cash flow;
• The company's international cable network portfolio (including AMC Networks International [formerly Chellomedia]), which diversifies its revenue base and provides opportunities to leverage its growing original programming slate;
• The trend of declining cable network audience ratings across the sector (though the company's audience ratings have gone against this trend so far);
• Increasing distribution fees, with affiliate fees comprising about 60% of total consolidated revenues; and
• Strong EBITDA margins, though somewhat lower than those of its peers because of a lower international segment margins.

Our "significant" financial risk assessment reflects our expectation that leverage, which was 4.7x as of Sept. 30, 2014, (including only about eight months of earnings from AMC Networks International) will decline to about 3x by the end of 2015 and potentially to the mid-2x area in 2016. This is a significant improvement from the company's 5.8x leverage when we first rated it in 2011. Still, we believe there are risks to our assessment because of a lack of clarity regarding the Charles Dolan family's controlling-shareholder return strategy (the family holds 67% voting power and comprise a majority of the board). We expect that the company will generate more than $350 million in free cash flow in 2015 and nearly $450 million in 2016. Although the company could use its growing cash balance to repay some of its debt (which it has done in the past), we remain uncertain regarding the intentions of its majority shareholder.

"The stable outlook reflects our expectation that AMC Networks will maintain adjusted leverage in the low 4x-area on a sustained basis, though we expect adjusted leverage to decline to the low-3x area in 2015," said Standard & Poor's credit analyst Naveen Sarma. "The company's lack of a clearly articulated financial policy constrains the rating. We view the probability of an upgrade and a downgrade as equally likely over the next few years."

We could lower the rating during the next two years if the company's network operating performance loses traction (potentially coinciding with an economic downturn), with steep audience ratings declines causing sharp EBITDA declines that show no sign of recovery. We could also lower the rating if management makes a large debt-financed acquisition or implements shareholder-favoring measures that increase leverage to above 5x, with no clear path to leverage returning to under 5x.

For an upgrade to occur, AMC Networks would need a publicly articulated leverage target, and we would need to see further progress in it diversifying its cash flow sources.

You May Also Be Interested In

• Alphabet stock surges 11% to record high on Q1 earnings beat, first-ever dividend
• Intel slides in afterhours trading as Q1 revenue misses, Q2 outlook falls short
• Range Resources (RRC) PT Raised to $41 at Mizuho