Fitch Affirms Globo at 'BBB-'; Outlook Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed Globo Comunicacao e Participacoes S.A. (Globo)'s Long-term Foreign-Currency (FC) Issuer Default Rating (IDR) at 'BBB-'. The Rating Outlook is Negative.. Fitch has also affirmed Globo's senior unsecured notes at 'BBB-'. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Globo's ratings reflect its strong business profile as the largest broadcaster and pay-TV programming provider in Brazil, supported by its strong content production. The ratings also reflect the company's strong cash flow generation, which enables its robust financial profile with zero leverage (positive net cash). Negatively, the rating is constrained by its operational concentration in Brazil, which has undergone tough economic conditions, and Brazil's Country Ceiling of 'BB+'.

Strong Market Position: Globo is the largest broadcaster and pay-TV programming provider in Brazil with about 35% of the national audience share. Globo's dominant market position stems from its business strategy, heavily focused on quality content production which has enabled it to garner the largest advertising revenue share in the industry over the years. As the company continues its high investment for strong content production, Fitch believes that the company's market leadership will remain intact over the medium term. Globo has extensive TV station networks in Brazil, through its five wholly owned TV stations (five broadcast channels), and its 119 affiliates that jointly cover approximately 99% of Brazilian households with TVs.

Weak Industry Trend: A subdued economic environment in Brazil has negatively affected the advertising demand in Brazil, which translated to negative revenue growth for Globo during the first half of 2016. Weak market condition has limited Globo's ability to aggressively raise advertising prices amid suppressed volume growth, resulting in the company's revenues and EBITDA generation falling by 2% and 22%, respectively, during the same period compared to a year ago. Despite the weak industry trend in Brazil, Globo has not actively reduced production costs, which reflects its effort to retain content competitiveness against its competitors. Negatively, increased production costs amid revenue contraction have directly impacted its operating margins. During 1H16, the company's EBITDA margin was just 23%, which negatively compared to 28% during 1H15 and 33% during 1H14.

Fitch does not foresee any material recovery in the operational environment and advertising demand at least for the short-term given still weak macro conditions in Brazil. As such, Fitch forecasts the company's EBITDA margin to remain well below 20% in 2016 and 2017, which compares to 24% in 2015 and 27% in 2014.

Positive Diversification: Increase in pay-TV penetrations bodes well for Globo's growth over the medium to long term given its significant exposure to the platform as the largest programming provider; Globo has 49 pay-TV channels, including eight of the 20 most watched channels in Brazil. The company benefits from a growing revenue contribution from its content/programming sales as it represented about 34% of total revenues in the first half of 2016, which favorably compares to only 21% in 2011. This positive diversification of cash generation will help the company cope with the weak advertising industry trend to a degree.

Robust Financial Profile: Globo boasts one of the strongest financial profiles among the diversified media companies in the region, backed by its strong cash flow generation and a high net cash position. Despite weaker performance, Fitch forecasts the company's pre-dividend FCF generation to remain solid during 2016-2018, with an average 6% pre-dividend FCF margins. Globo's FCF generation is forecast to temporarily turn negative in 2016 due to high dividends of BRL2.2 billion paid during 1H16. Positively, as the company refrains from aggressive shareholder returns with a light capex requirement, estimated to be about 4% of its revenues in 2017, the company should return to positive FCF generation and maintain its ample cash position.

DERIVATION SUMMARY

Globo is well-positioned relative to its regional peers in the media segment in terms of market position, content production, as well as financial profile. Globo's lack of operational diversification compared to Grupo Televisa S.A.B., which is the largest broadcaster in Mexico with a significant exposure to telecom operations, is fully mitigated by the company's stronger FCF generation and zero leverage. The company's business profile is deemed superior compared to its other media peers in the 'B' or 'BB' category, such as TV Azteca S.A.B. de C.V. in Mexico and Radio e Televisao Banderiantes Ltda. in Brazil. Globo's FC IDR is constrained to a maximum of one notch above Brazil's Country Ceiling of 'BB+' given the company's operational concentration in Brazil.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Globo include:

--Negative revenue growth in 2016, followed by a modest low-single digits revenue growth in 2017 and 2018 due to weak advertising demand;

--EBITDA margins to remain suppressed well below 20% in 2016 and 2017 due to high production costs;

--Capex-to-sales ratio to remain at around 4.5% in 2016 and fall to 4% in 2017 following the investments for production facility;

--Negative FCF generation in 2016, but to reverse back to positive from 2017 in the absence of sizable dividend payments;

--Net leverage to remain zero (positive net cash) over the medium to long term.

RATING SENSITIVITIES

Future Developments That May, Individually or Collectively, Lead to Positive Rating Action

--Positive rating actions are limited by Brazil's country ceiling of 'BB+' .

Future Developments That May, Individually or Collectively, Lead to Negative Rating Action

--For both FC and LC IDRs, a further ratings downgrade of Brazil's sovereign ratings and a resultant lower Country Ceiling will lead to a ratings downgrade.

--For its LC IDR, aside from the downgrade of Brazil's Country Ceiling, material erosion of its FCF generation and cash balance due to regulatory/competitive pressures, a significant drop in Globo's viewership market share due to a lack of attractive content, or sizable acquisitions and aggressive shareholder distributions could pressure the ratings.

LIQUIDITY

Globo has robust liquidity as its readily-available-cash balance, amounted to BRL6.6 billion, fully covered its total debt of BRL2.9 billion as of June 2016. The company has long debt maturities, and its short-term debt was just BRL66 million during the same period. Globo does not face any sizable bullet maturity until 2022 when USD500 million of senior notes become due.

FULL LIST OF RATING ACTIONS

Globo Comunicacao e Participacoes S.A.

--Long-term Foreign-Currency IDR affirmed at 'BBB-'; Outlook Negative;

--Long-term Local-Currency IDR affirmed at 'BBB+'; Outlook Stable;

--National Long-Term Rating affirmed at 'AAA(bra)'; Outlook Stable;

--USD325 million senior unsecured notes due 2025 affirmed at 'BBB-';

--USD200 million senior unsecured notes due 2022 affirmed at 'BBB-';

--USD300 million senior unsecured notes due 2022 affirmed at 'BBB-'.

Summary of Financial Statement Adjustments

Fitch has adjusted the value of some of Globo's marketable securities per Fitch's criteria. Adjusted items were mainly its holdings in investment funds and others, which amounted to BRL1.2 billion and BRL49 million, respectively. Fitch has taken 30% discount on the instruments' face value to calculate Fitch's readily-available cash balance.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015131

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015131

Endorsement Policy

https://www.fitchratings.com/regulatory

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Source: Fitch Ratings

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