Moody's Downgrades Viacom (VIAB) to 'Baa3'; Outlook is Stable
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Moody's Investors Service downgraded Viacom Inc.'s (Nasdaq: VIAB) senior unsecured long-term debt ratings to Baa3 from Baa2 and its short term commercial paper rating to Prime-3 from Prime-2 following the company's announcement that it plans to access debt capital markets in the near term to improve liquidity. The company's rating outlook is stable.
Today's rating action reflects the continued weaker than anticipated rebound in the company's operating performance and cash flow contributions, and our expectation for higher near-term adjusted leverage which is well beyond levels commensurate with a Baa2 senior unsecured rating. Viacom's leverage has risen well above the 3.25x sustained leverage threshold for the Baa2 rating leaving no room for additional debt or for operational setbacks under the company's ratings. However, as stated in Moody's credit focus report dated August 1, 2016, Moody's would not take an action on the company's credit ratings until the corporate governance issues were resolved and near-term strategic decisions are announced such that future financial and operating strategies became more clear.
Viacom announced yesterday that it plans to raise debt to fund near-term maturities, where we previously expected those maturities to be repaid with free cash flow generation, resulting in potentially slower deleveraging. Moody's acknowledges the liquidity benefits of the expected new debt issuance, and also the positive impact of the announced dividend reduction to the company's financial flexibility. The reduction in dividends was anticipated and we believe is a prudent step on top of previous steps to halt share repurchases and increase investment in network programming. However, we have previously stated that we believe the added financial flexibility from the announced dividend cut will not on its own be sufficient to materially reduce gross debt and adjusted leverage to levels consistent with the higher Baa2 debt rating in the intermediate term. Furthermore, the planned debt issuance will delay deleveraging and reduction in absolute debt as was previously anticipated by Moody's in its estimates.
Moody's recognizes Viacom's commitment to maintain investment grade credit ratings and we believe the company's board and management team will take steps to de-lever the balance sheet and strengthen financial flexibility. Moody's anticipates that performance at the Media Networks segment will improve in fiscal 2017, particularly compared to the weakness is fiscal 2016, and the company will deliver better results and cash flows over the next 12 months. Based on our expectation for an improvement in EBITDA and free cash flow and assuming the company pre-pays debt maturities with funds in excess of working cash of $250-$300 million, we estimate that Viacom's debt-to-EBITDA (incorporating Moody's adjustments) will decline to under 4.0x by the end of fiscal 2017. The Baa3 senior unsecured rating assumes that Viacom's adjusted leverage is sustained well under 4.0x over the rating horizon and we believe the company could take further strategic fiscal and operating steps to bring Moody's adjusted leverage to around 3.5x if it rationalizes its networks, improves viewer ratings, stabilizes Paramount, and deploys levers to reduce debt more quickly. The Baa3 rating assumes that the company's increased programming investments will begin to yield results and viewership ratings for its shows along with advertising sales improves going forward, and that the company will enjoy the benefits of moderate contractual escalations in its network affiliate agreements. Moody's cautions that inability to drive operating performance to deliver stronger results and turnaround performance of its programming could put downward pressure on the Baa3 rating, even if financial metrics are reflective of an investment-grade credit profile. This will be a growing concern as the company gets closer to the next affiliate negotiation cycle in coming years.
The stable outlook reflects our view that even though adjusted leverage is currently high for the Baa3 rating, an expected increase in EBITDA and cash flows in fiscal 2017 will allow the company financial flexibility to reduce gross debt and bring Moody's adjusted leverage to comfortably under 4.0x within the next 12 months.
What Could Change the Rating - Up
Considering the pressure on its businesses, an upgrade of the credit rating is unlikely over the near term. However, a positive rating action could occur if there is remarkable improvement in the performance of the company's programming and Moody's adjusted leverage is sustained at or under 3.0x. This level could be expanded if the company demonstrates that it can return to sustained competitive viewer ratings on its major branded networks, and that it can transition well within the evolving network distribution ecosystem. Management's commitment and a strong liquidity profile will also be necessary for a ratings upgrade.
What Could Change the Rating - Down
The company's ratings could be downgraded if it does not reduce adjusted leverage within the next twelve months and it remains sustained at or above 4.0x. Viacom's ratings could also be downgraded if it does not show material traction in the performance of its programming and advertising revenues or management deviates from its plans of strengthening the balance sheet and allows liquidity to deplete. The threshold for a downgrade could be lowered over the medium-term if it experiences secular pressures due to poor execution within the evolving ecosystem.
The principal methodology used in these ratings was Global Broadcast and Advertising Related Industries published in May 2012. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
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