Moody's Affirms Rovi's (ROVI) CFR, Outlook Remains Negative

Moody's Investors Service affirmed Rovi Corporation's (Nasdaq: ROVI) Ba3 Corporate Family Rating and SGL-2 Speculative Grade Liquidity rating. Moody's also revised Rovi's Probability of Default Rating ("PDR") to Ba3-PD from B1-PD and Rovi Solutions Corporation's and Rovi Guides, Inc.'s 1st lien senior secured credit facilities' ratings to Ba2 from Ba3. The rating outlook remains negative.

The following summarizes the rating activity:

Issuer: Rovi Corporation

Ratings affirmed:

Corporate Family Rating at Ba3

Speculative Grade Liquidity Rating at SGL-2

Ratings upgrade:

Probability of Default Rating to Ba3-PD from B1-PD

Issuer - Rovi Solutions Corporation (Co-issued by: Rovi Guides, Inc.)

Ratings upgraded:

$175 million 1st lien senior secured revolving credit facility due 2019 upgraded to Ba2 (LGD3) from Ba3 (LGD3)

1st lien senior secured term loan A due 2019 upgraded to Ba2 (LGD3) from Ba3 (LGD3)

1st lien senior secured term loan B due 2021 upgraded to Ba2 (LGD3) from Ba3 (LGD3)

Outlook: Negative

RATINGS RATIONALE

The affirmation of Rovi's Ba3 CFR reflects the company's recent progress in reducing financial leverage to about 6 times (Moody's adjusted) from approximately 7.0 times at the end of September 2013, while sustaining favorable revenue trends within the service provider business segment, generating free cash flow in the mid teen percentages of debt and maintaining a good liquidity profile. The affirmation also reflects Rovi's sizeable cash balances (about $337 million at FY end 2014; albeit down from $522.5 million at FY end 2013), and its comparable net leverage of around 4.4 times (Moody's adjusted) currently.

The negative outlook continues to reflect Moody's concerns regarding (i) major contract renewals in 2015/2016 with service providers DIRECTV, Comcast, Time Warner Cable (TWC) and Echostar, (ii) the company's still elevated financial leverage (which is weak for the rating category) and the low prospect for meaningfully deleveraging over the near to medium term, absent a substantial reduction in funded debt or potential increase in EBITDA resulting from the major contract renewals in 2015/2016, and (iii) challenges in regards to gaining revenue traction within the consumer electronics segment. The negative outlook also incorporates the company's execution risk as it re-orients its product portfolio and invests in cloud based guidance, metadata and analytics offerings.

The ratings for Rovi's senior secured debt instruments reflect its senior most position in the capital structure. The secured debt ratings are determined in conjunction with Moody's Loss Given Default Methodology and reflect the overall probability of default for Rovi, which Moody's rates as Ba3-PD, and a loss given default assessment of LGD3. The Company's capital structure consists of $1.0 billion of first lien senior secured debt (which includes a $175 million revolver) and $345 million (principal value) of 2020 convertible notes (unrated by Moody's) issued in March 2015. Rovi Solutions Corporation and Rovi Guides, Inc. (Rovi's direct and wholly-owned subsidiaries) are co-borrowers under the senior secured credit facilities, which are guaranteed by Rovi. The credit facilities are secured by a first priority security interest in substantially all tangible and intangible assets and capital stock of Rovi's domestic subsidiaries, and the pledge of 66% of capital stock of certain foreign first-tier subsidiaries. With the company's issuance of 2020 convertible notes, Moody's has revised Rovi's PDR to Ba3-PD from B1-PD and the ratings on the credit facilities to Ba2 from Ba3, reflecting re-introduction of unsecured debt into the capital structure with the issuance of the 2020 convertible notes. The prior PDR and credit facility ratings did not reflect an expectation for the issuance of convertible debt after the February 2015 put date of the 2040 convertible notes.

Moody's does not anticipate a ratings upgrade in the near term given the company's high leverage, significant upcoming contract renewals and product execution risks. The ratings outlook could be stabilized if the company renews the major contracts up for renewal in 2015/2016 in a timely and economically favorable manner and demonstrates sustained improvement in revenues and operating cash flow, such that debt-to-EBITDA and free cash flow to debt are maintained at below 4.5 times (incorporating Moody's standard analytical adjustments) and in excess of 10% of total debt, respectively.

Moody's could downgrade Rovi's ratings if sequential improvement in revenues and EBITDA appears unlikely over the next one to two years, such that Moody's comes to expect that leverage will remain above 4.5 times (Moody's adjusted) or free cash flow to debt is expected to remain below 10%. The ratings could also be lowered if Rovi is unable to renew upcoming licensing agreements with key customers in a timely manner and with economically feasible terms or if the competitive position of its intellectual property portfolio weakens.

The principal methodology used in this rating was the Global Software Industry published in October 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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