S&P Cuts Getty Images to 'B-'; Shutterstock (SSTK) Lower in Concert

Shutterstock (NYSE: SSTK) is lower Tuesday amid a downgrade of Getty Images by Standard & Poor's. The full report follows:

Standard & Poor's Ratings Services said today that it lowered its corporate credit rating on Seattle-based Getty Images Inc. to 'B-' from 'B'. The rating outlook is negative.

At the same time, we lowered our issue-level rating on the company's first-lien credit facilities to 'B-' from 'B'. The '3' recovery rating remains unchanged, indicating our expectation for meaningful recovery (50%-70%; low end of the range) of principal in the event of a payment default.

We also lowered our issue-level rating on the company's unsecured notes to 'CCC' from 'CCC+'. The '6' recovery rating remains unchanged, indicating our expectation for negligible recovery (0%-10%) of principal in the event of a payment default.

"The downgrade reflects Getty Images' rising debt leverage and lower free cash flow due to poor operating performance in the company's midstock segment amid increased competitive pressure," said Standard & Poor's credit analyst Elton Cerda. We expect that Getty Images' leverage will continue to rise because its operating performance will likely remain soft in the first half of 2015 due to competitive pressure. Additionally, we expect that the company will increase marketing spending in 2015 to drive revenue growth. These factors will likely continue to weaken the company's financial risk profile. Absent a turnaround with positive revenue and EBITDA growth with margin expansion, the company's capital structure may become unsustainable.

The negative rating outlook incorporates our expectation that Getty Images' leverage will continue to rise through the first half of 2015 as a result of weak operating performance from competitive pressure and marketing investments. Nevertheless, we expect its liquidity to remain "adequate" over the next 12 months.

We could lower the rating if Getty Images' operating performance shows no signs of improvement by the second half of 2015 and if we become convinced that discretionary cash flow will be below our expectation. Additionally, we could lower the rating if EBITDA coverage of interest approaches 1.25x, which could occur if domestic and global competition and weak economic conditions continue, causing revenue to drop 5% and EBITDA to fall 10%.

We could revise the outlook to stable if Getty Images is able to stabilize its operating performance and contain the competitive threat to its midstock segment and grow its discretionary cash flow.

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