Viacom (VIAB) Ratings Affirmed by Fitch Amid Exec Transition
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According to Fitch Ratings, Viacom, Inc.'s (Nasdaq: VIAB)(Viacom) announced leadership transition, creation of an expanded board of directors and the settlement of the litigation related to corporate governance issues is a credit positive but will not have an impact on Viacom's 'BBB' Issuer Default Rating. The Rating Outlook remains Negative.
Viacom's approximately $12.8 billion of debt (face value - including commercial paper) outstanding as of June 30, 2016 is affected by Fitch's action. A full list of ratings follows at the end of this release.
Resolution of the litigation involving Viacom's controlling shareholder, National Amusements, Inc. and NAI Entertainment Holdings LLC (together, NAI) and Viacom's board of directors and senior executives, resulting in an orderly transition of Viacom's leadership and board, is a positive development for Viacom's credit profile. The agreement eliminates the overhang created by the ongoing discord among the parties and positions and allows the company to put in place strategic and operating plans to address the persistent weakening of Viacom's operating profile.
Fitch cautions, however, that the leadership changeover is a two-step process. Viacom's new board, working with the company's interim president and CEO, Thomas Dooley, will finalize the succession plan for Viacom's president and CEO. Fitch recognizes that Viacom's financial and strategic plans will remain in flux until the board agrees on a new president and CEO and final plans are in place. We expect a permanent president and CEO will be in place by Sept. 30, 2016.
The Negative Outlook incorporates the uncertainty related to Viacom's ability to stabilize and strengthen its operating profile amid the persistent secular challenges to its business model. Viacom's new board of directors and management will face the challenge of strengthening the company's operating profile and competitive position. The strategies currently in place have struggled to produce tangible evidence that they are regaining positive operating momentum and reducing volatility in the company's key cable network businesses. The expected rebound of Viacom's operating profile has taken longer than Fitch previously anticipated.
Fitch believes reversing these negative operating trends will be difficult in the current operating environment. Competition for viewing audience within Viacom's targeted demographic will remain fierce, as this younger demographic is migrating away from traditional linear video programming. Moreover, given Viacom's reliance on the kids and teen demographic segments, the company depends more on advertising categories which target kids and teens, relative to its peer group. To combat these issues, Viacom has increased its investment in programming, focusing on producing more original programming across its cable network portfolio, adding more scripted shows and event programming, and becoming more selective in acquiring programming. In addition to the programming investment, Viacom has created products to improve the monetization of both linear and non-linear viewership and improve the yield on its advertising inventory, including its Viacom Vantage, Velocity and Echo offerings.
The growth rates of Viacom's affiliate fee revenues also lag behind its peer group of large diversified media companies and present a new challenge to the company's operating model. Growth has slowed due to recent subscriber rate adjustments and the re-tiering of certain networks. Affiliate fee revenue growth will be further hampered during the remainder of fiscal 2016 and possibly into fiscal 2017 due to the difficulty in signing previously expected SVOD agreements, attributable to the ongoing corporate governance issues. Fitch's base case assumes that domestic affiliate fee revenues will decline at a mid-single-digit rate during fiscal 2016 before rebounding to a low-single-digit growth rate during fiscal 2017.
Viacom's historically aggressive capital allocation posture, which has long favored share repurchases in excess of free cash flow (FCF) generation, along with the weak operating results have combined to reduce Viacom's financial flexibility and weaken its credit profile. Viacom's leverage increased to 3.6x during the latest 12 month (LTM) period ended June 30, 2016, which is outside the company's 2.75x to 3.0x leverage target. Fitch anticipates that leverage will improve during fiscal 2017 but will remain above 3x through Viacom's fiscal 2017 year-end before trending below 3x during fiscal 2018. Importantly, Fitch does not anticipate any meaningful debt reduction during the remainder of calendar 2016 and expects scheduled maturities during 2017 to be refinanced.
Positive: Upward ratings momentum is unlikely during the current ratings horizon. Stabilization of the Outlook at the current rating is predicated on the company successfully executing on its strategies to address persistent secular threats to its business, and recapturing positive operating momentum, as evidenced by sustainable positive domestic advertising and affiliate fee revenue growth and expanding operating margins. In addition, Fitch needs to observe clear articulation of a strategy to strengthen Viacom's operating profile.
Negative: Negative rating actions are more likely to coincide with the company's inability to strengthen its operating profile and reduce leverage below 3.5x. Resumption of share repurchase activity or other aggressive financial policy decisions that delay the anticipated improvement of Viacom's credit profile would also result in negative rating action.
FULL LIST OF RATINGS
Fitch currently rates Viacom as follows:
--Long-term Issuer Default Rating 'BBB';
--Senior unsecured notes and debentures 'BBB';
--Senior unsecured bank facility due 2019 'BBB';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
The Rating Outlook remains Negative.
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