Fitch Rates Discovery Comm's Proposed Issuance 'BBB-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB-' rating to Discovery Communications LLC's (Discovery) proposed senior unsecured notes. Proceeds from the offering are expected to be used for general corporate purposes, including debt repayment. The notes will be guaranteed on a senior unsecured basis by Discovery Communications, Inc. As of Dec. 31, 2015, Discovery had approximately $7.8 billion of debt outstanding. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

Discovery's ratings are supported by the company's strong core brands, particularly the Discovery and TLC brands, both of which reach nearly 100 million subscribers across the U.S. In addition, the ratings incorporate the revenue and growth prospects of the company's international business segment, global carriage, leverageable content, robust free cash flow (FCF), and solid credit metrics at the 'BBB-' Issuer Default Rating. Ratings concerns center on the significant contribution of cyclical advertising revenue relative to peers, a competitive landscape for similar programming, volatility associated with hit-driven content and the company's dependence on the Discovery and TLC brands.

Fitch believes Discovery's credit profile has sufficient flexibility to accommodate share repurchase activity at the 'BBB-' level. Debt incurrence to fund share repurchase activity is incorporated into ratings up to the company's 3.5x maximum leverage threshold, which is well within the range for Discovery's 'BBB-' rating.

Discovery's solid FCF generation, strong credit protection metrics and minimal near-term scheduled maturities afford the company considerable financial flexibility at 'BBB-'. Fitch anticipates that Discovery is positioned to generate annual FCF of $1.3 billion to $1.4 billion, given the company's high operating margins, global distribution platform, and low capital intensity associated with the cable programming business.

KEY ASSUMPTIONS

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

--Low- to mid-single-digit top-line growth;

--Margin declines driven by increased exposure to lower margin International properties;

--Annual FCF generation of approximately $1.3 billion to $1.4 billion;

--Debt issuance to fund expected aggregate share buybacks and M&A activity in excess of annual FCF generation.

RATING SENSITIVITIES

An upgrade is unlikely over the medium term, given the company's stated willingness to operate at the top end of its leverage target and the limited depth of its brands. Factors considered for an upgrade include an explicit commitment from management and a compelling rationale for Discovery to operate at a more conservative leverage metric, and material viewership on new channel launches that will drive increased advertising and affiliate fees and enhance revenue diversity.

Negative ratings pressure could result from a more aggressive financial policy with leverage exceeding Fitch's 4.0x threshold for the rating in the absence of a credible plan to return leverage below the threshold. Rating pressure could also result from meaningful customer defections to free viewing platforms leading to revenue declines or significant margin and FCF pressure from higher programming costs.

LIQUIDITY

As of Dec. 31, 2015, the company had solid liquidity consisting of $390 million in cash, and $1.2 million of availability under its $2 billion revolving credit facility due 2021. Discovery's liquidity position and overall financial flexibility are supported by FCF, which amounted to approximately $1.1 billion for the fiscal year ended Dec. 31, 2015. Fitch expects pro forma FCF to range from $1.3 billion to $1.4 billion during the ratings horizon.

FULL LIST OF RATING ACTIONS

Fitch assigns the following rating:

--Senior unsecured notes 'BBB-'.

Fitch currently rates Discovery as follows with a Stable Rating Outlook:

Discovery Communications LLC

--Long-term IDR at 'BBB-';

--Short-term IDR at 'F3';

--Senior unsecured revolving credit facility at 'BBB-';

--Senior unsecured notes at 'BBB-';

--Commercial paper at 'F3'.

Date of Relevant Rating Committee: Nov. 3, 2105

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000606

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160308006346/en/

Fitch Ratings
Primary Analyst
Jack Kranefuss
Senior Director
+1-212-908-0791
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rachael Shanker
Associate Director
+1-212-908-0649
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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