Fitch Affirms CBS's IDR at 'BBB'; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BBB' Issuer Default Ratings (IDRs) of CBS Corporation (CBS) and its subsidiaries. Fitch has also affirmed the specific issue ratings assigned to CBS. The Rating Outlook for all of CBS's ratings is Stable. A full list of ratings follows at the end of this release. Approximately $7.7 billion of debt outstanding as of March 31, 2015 is affected by Fitch's action.

KEY RATING DRIVERS

--CBS's revised leverage target ranging between 2.5x and 2.75x is in line with Fitch's 2.75x gross leverage target for the current ratings. CBS's content centric business strategy, which focuses on more stable and recurring revenue streams and positions the company to reduce its exposure to more volatile advertising revenues can, in Fitch's opinion support the higher leverage target.

--Share repurchases continue to be the centerpiece of CBS's capital allocation strategy. Shareholder returns that exceed free cash flow (FCF) generation are incorporated into the current ratings to the extent that leverage remains below Fitch's 2.75x total leverage threshold.

--Fitch anticipates that CBS will maintain a rational approach to managing its balance sheet while increasing leverage to its target. Capital allocation will continue to prioritize investment in content creation and programming while preserving the historically conservative financial policy of its capital structure in the context of its leverage target and participating in merger and acquisition activity.

--Growing content licensing and distribution, affiliate and subscription revenues are improving CBS's revenue mix and are in line with the company's long-term objective to increase non-advertising revenue sources. However, CBS's exposure to advertising revenues at 50% is relatively high compared to other diversified media companies.

--CBS expects that its retransmission consent/reverse compensation revenue will grow to $1 billion by 2017 and to $2 billion by 2020. This revenue stream provides a stable and recurring element to CBS's revenue base, which mitigates some of the volatility associated with advertising revenues. Additionally, the high margin characteristic of these revenues strengthens the company's operating profile.

CBS's ratings reflect the strong competitive position of the CBS television network and studio as well as largely stable demand for CBS's various advertising platforms. The broadcast network, owing to its ratings strength, is well-positioned to capture large viewing audiences amid an increasingly fractured media landscape. Fitch believes that demand for the television studio's content remains strong across all major end markets.

Fitch's ratings for CBS continue to be supported by a strong television and radio station presence in the top 25 U.S. markets, leading positions in first-run syndication, a robust library and pipeline of off-network syndicated programming, and higher portion of carriage and re-transmission revenues. Re-transmission fees, and increasingly, reverse network compensation, remain a small portion of overall revenues but will make an increasingly meaningful contribution to operating profits, as they are stable, recurring and have high incremental margins.

CBS expects its retransmission consent/reverse compensation revenue will grow to $1 billion by 2017 and to $2 billion by 2020 as these revenue streams are among CBS's fastest growing revenue segments. Fitch believes that the combination of escalators built into existing agreements and anticipated rate increases in new deals that will be executed firmly place CBS on a path to achieve its revenue goals. Growing retransmission and reverse compensation revenues is in line with CBS's operating strategy as these revenues provide the company with a stable and recurring element of its revenue base which mitigates some of the volatility associated with advertising revenues. Obtaining its revenue objectives largely depends on CBS's ability to maintain strong network ratings and retain its valuable sports programming rights portfolio including its rights to the NFL.

Rating concerns include an above-average exposure to cyclical advertising revenue and the company's capacity to adapt to ever-changing media consumption patterns, emerging distribution platforms, and technology evolution all of which will drive audience fragmentation and disrupt traditional media models. Additional concerns center on the company's ability to balance escalating programming expense and production costs with the requirement to consistently deliver programs that drive incremental share of an increasingly fragmented viewing audience while maintaining or expanding operating margins.

SHAREHOLDER RETURNS

CBS's ongoing investment in content and programming holds the highest priority in terms of capital allocation. Share repurchases continue to be the centerpiece of CBS's capital allocation strategy and the primary tool the company will utilize to achieve its leverage target. Shareholder returns that exceed FCF generation are incorporated into the current ratings to the extent that leverage remains below Fitch's 2.75x total leverage threshold.

Shareholder returns (dividends and share repurchases) totaled approximately $3.9 billion during the year ended Dec. 31, 2014 (before consideration of CBS Outdoor Americas) representing 364% of FCF before dividends. CBS repurchased approximately $1.0 billion of its common stock during the first quarter of 2015; leaving approximately $3.8 billion of capacity remaining on its share repurchase authorization as of March 31, 2015. Fitch expects CBS will utilize the remaining share repurchase authorization by year-end 2016.

Leverage and Financial Policy

CBS's capital structure and credit protection metrics remain stable and within Fitch's expectations for the current rating. However, CBS's new leverage target diminishes the capacity and financial flexibility the company has at the current rating level from Fitch's perspective. That said, Fitch expects that CBS will continue investing in its core businesses and growth initiatives and support shareholder returns within the context of managing to its leverage target. Consolidated leverage was 2.3x as of the latest 12 months (LTM) period ended March 31, 2015.

FCF and Liquidity

The operating leverage inherent in CBS's business along with modest capital intensity enables the company to generate meaningful levels of free cash flow and provides the company with substantial financial flexibility. CBS generated approximately $587 million of FCF from continuing operations (defined as cash flow from operations less capital expenditures and dividends), during the LTM period ended March 31, 2015, which follows $712 million of FCF generation during the year ended Dec. 31, 2014. Fitch notes that 2014 FCF generation was impacted by a $360 million payment related to the early termination of debt during 2014 and higher programming costs. Going forward, Fitch anticipates that the company will consistently generate consolidated free cash flow in excess of $1.2 billion providing CBS with adequate flexibility with in the current ratings to accommodate its capital allocation policy.

CBS's liquidity position is strong and supported by $331 million of cash on hand as of March 31, 2015, $2.5 billion in available credit facilities (all of which was available as of March 31, 2015, and expected FCF generation. CBS's revolver commitment expires on Dec. 15, 2019. Scheduled maturities are well-laddered and manageable considering expected FCF generation, reliable market access and backup liquidity. Approximately 20% of the company's debt outstanding as of Dec. 31, 2014 (pro forma for the January 2015 debt issuance) is scheduled to mature over the next five years, including $200 million during 2016, $400 million in 2017, $300 million in 2018 and $600 million in 2018.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case include:

--Low to mid-single digit revenue growth is assumed within CBS's Entertainment segment. Revenue growth benefits from the broadcast of the Superbowl in 2016 and strong political ad spending.

--The base case further assumes a stable economic and advertising environment.

--Syndication revenues will continue to be variable and dependent on content availability. CBS is positioned to capitalize on its strong position in first run syndication (15 of the top 20 syndication shows), a solid pipeline of content coming to off-network syndication and incremental demand for content from OTT and SVOD providers.

--Cable Network segment revenue growth reflects the stability of the business and modest affiliation fee increases. The company's investment in original programming supports affiliation fee growth. Fitch anticipates mid-single digit revenue growth.

--Publishing revenues decline modestly in the base case reflecting the ongoing impact of digital migration.

--Local Broadcasting segment again incorporates a stable economic and advertising environment as well as the typical political advertising cycle. Additionally the segment will benefit from growing retransmission consent revenues. These considerations are offset somewhat by continued weak CBS Radio revenue growth. Revenue growth ranges between 4% and -1% in the base case.

--From a margin perspective, the base case assumes modest margin expansion within the Entertainment segment reflecting growth in higher margin syndication and OTT and SVOD revenues. This is offset by higher content and programming costs.

--Cable Network margins are pressured due to increasing programming costs due to higher investment in original programming. Offset by benefits from new distribution windows.

--Publishing margins increases modestly to reflect changing revenue mix to higher margin digital sales.

--Local Broadcast margins move in tandem with the political cycle.

--All debt is refinanced at maturity. Incremental debt issuance to support share buybacks and lever the balance sheet to the new target over the ratings horizon.

RATING SENSITIVITIES

Positive rating action would likely coincide with CBS adopting a more conservative financial policy highlighted by a gross leverage target of 2.25x or lower. Moreover, Fitch needs to observe meaningful progress in CBS's efforts to transform its revenue mix and reduce its reliance on cyclical advertising revenues. Meanwhile, CBS will need to demonstrate that its operating profile can sustain itself amid ongoing competitive pressures, changing media consumption patterns and evolving technology platforms.

Negative rating actions are more likely to coincide with discretionary actions of CBS management including, but not limited to, the company adopting a more aggressive financial strategy which increases leverage beyond 3x or event-driven merger and acquisition activity that drive leverage beyond 3.5x in the absence of a creditable deleveraging plan.

Additionally, negative rating actions could result should Fitch begin to observe a negative impact from alternative content distribution platforms and other forms of entertainment that is significantly larger than Fitch's expectations. Other negative triggers include a weakening of the company's television studio's ability to produce desired television content, or secure programming on its television networks that consistently delivers viewing audience and related advertising revenues.

Total debt at March 31, 2015 was $7.7 billion, which consisted primarily of:

--Approximately $7.6 billion senior unsecured notes and debentures maturing 2016-2045;

--$46 million senior unsecured notes issued at CBS's wholly owned subsidiary CBS Broadcasting, Inc., which are not guaranteed by CBS Corp;

--$95 million of capital leases and other obligations;

--CBS did not have any outstanding commercial paper as of March 31, 2015.

Fitch has affirmed the following ratings with a Stable Outlook:

CBS Corporation (CBS)

--Long-term IDR at 'BBB';

--Senior unsecured at 'BBB';

--Short-term IDR at 'F2';

--Commercial Paper at 'F2'.

CBS Broadcasting, Inc.

--Long-term IDR at 'BBB';

--Senior unsecured at 'BBB'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984367

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Fitch Ratings
Primary Analyst
David Peterson
Senior Director
+1-312-368-3177
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Brian Yoo, CFA
Senior Director
+1-212-908-9175
or
Committee Chairperson
John Culver, CFA
Senior Director
+1-312-368-3216
or
Media Relations
Alyssa Castelli, +1 212-908-0540
[email protected]
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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