S&P Removes Central European Media Enterprises (CETV) from CreditWatch Negative

Standard & Poor's Ratings Services said that it had affirmed its 'B-' corporate credit rating on Bermuda-registered TV broadcaster Central European Media Enterprises Ltd. (Nasdaq: CETV) (CME). The outlook is negative.

At the same time, we affirmed the 'B-' issue rating on the €240 million senior secured notes due 2017 issued by CME's subsidiary CET 21 spol.s.r.o. (CET21).

The ratings were removed from CreditWatch negative, where we placed them on Feb. 14, 2014.

We withdrew the 'CCC+' issue rating on the €273 million notes due 2016 issued by CME, following their redemption and cancellation.

We revised down our assessment of CME's stand-alone credit profile (SACP) to 'ccc+' from 'b-' because we expect materially negative free operating cash flow generation in the course of 2014. This is the result of the still-fragile advertising spending environment in CME's countries, the company's need to adjust its pricing policy in the Czech Republic to grow advertising revenues, and the normalization of its programming-cost payables that were delayed for the past few years.

We consider that the company's liquidity position improved, thanks to the $115 million revolving credit facility provided by Time Warner Inc., as well as cash balances that have allowed the company to cope with ongoing operating requirements. However, we believe that liquidity will likely come under pressure relatively soon, given CME's need to address its 2015 maturity.

In our view, the prospect of sluggish operating performance over the coming quarters could pose increasing refinancing risk. Such risk would make it more difficult for CME to approach investors, other than Time Warner, to refinance the $261 million of convertible notes due in November 2015.

We assess CME's business risk profile as "weak" and its financial risk profile as "highly leveraged." Together, these assessments lead to a split anchor of 'b' or 'b-' for CME. We chose the 'b-' anchor to reflect the company's persistently high leverage and track record of negative cash flow. The anchor is the starting point in assigning an issuer credit rating to a company under our corporate criteria. We subtract one notch from the anchor because of our negative view of the company's capital structure, resulting in a SACP of 'ccc+'.

The one-notch downward adjustment reflects our view of CME's unsustainable capital structure and the currency risk associated with the debt. CME's revenues are generated in local currencies and their fluctuations might have an impact on debt and credit metrics, since CME's debt is denominated in euro and U.S. dollar, and is not hedged for principal.

The rating is one notch higher than the SACP based on our group rating methodology. We assess CME as a "moderately strategic" subsidiary for its New York City-based entertainment conglomerate, Time Warner, based on our view that CME is part of the group's long-term strategy, and is therefore unlikely to be sold. We do not consider CME to be "strategically important," based on our criteria, for two reasons. First, there are no specific incentives, such as cross-default clauses or guarantees, which would require long-term commitment by Time Warner to CME. Second, we are cautious regarding the
medium-term prospects for CME.

The negative outlook reflects our opinion that CME's ability to refinance its 2015 debt maturity may be limited, absent any additional financial support from key shareholder Time Warner, given our anticipation of lackluster improvement in earnings and substantially negative free cash flow generation over the next few quarters, as well as our expectation of substantially negative free cash flow during 2014.

We could downgrade CME if we perceive a faster–than-anticipated deterioration in CME's liquidity over the coming months, mainly resulting from higher-than-expected cash burn. We could also lower the rating if CME were to consider debt-restructuring measures that we would deem tantamount to a default under our criteria.

A revision of the outlook to stable or other positive rating action could stem from a material improvement in advertising spending in the company's key markets that translates into an EBITDA margin at about 20% and resulting in a significant improvement of prospects for free cash flow generation. Such a scenario could result in improved prospects for refinancing or financial support from Time Warner to timely meet the group's 2015 debt maturities.

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