Overview
- Viacom is making significant operational and financial progress towards stabilizing operating results and reducing leverage. We also no longer expect that a merger between Viacom Inc. and CBS Corp. is likely in the near term due to ongoing litigation between CBS and its parent, National Amusements Inc. (NAI). Therefore, we are resolving the CreditWatch and assessing Viacom's credit risk on a stand-alone basis.
- We are affirming all our ratings on Viacom, including the 'BBB-' corporate credit rating, and are removing them from CreditWatch with negative implications.
- Although the company has made progress in reducing leverage, the negative outlook reflects the potential for a lower rating if Viacom is unable to reduce adjusted leverage to 3.5x by fiscal year-end 2018 and to below 3.25x by mid-2019.
Rating Action
On July 12, 2018, S&P Global Ratings affirmed all of its ratings on New York City-based Viacom Inc. and removed them from CreditWatch, where we placed them with negative implications on Nov. 17, 2017. The outlook is negative. The affected ratings include the 'BBB-' corporate credit rating, the 'BBB-' issue-level rating on the senior unsecured debt, the 'A-3' short-term rating, and the 'BB' issue-level rating on the junior subordinated notes.
Rationale
The ratings affirmation and negative outlook reflects our view that while adjusted leverage is currently above our 3.25x threshold for the 'BBB-' rating (leverage is 3.7x as of March 31, 2018), Viacom has made significant operational and financial progress to improve its operations and reduce adjusted leverage. We expect the company to reduce adjusted leverage to 3.5x by fiscal year-end 2018 and below 3.25x by mid-2019. Viacom has implemented several initiatives to try to mitigate the secular challenges facing the domestic television ecosystem. Some of these initiatives like their investments in targeted advertising technology are helping to offset some of the weakness in linear advertising and while advertising revenue growth is still negative it is more in line with the broader industry than in past years. Additionally, Viacom is trying to mitigate the affiliate fee pressures it faces by increasing the value it provides to distribution partners through increased stacking rights, partnerships on digital advertising initiatives, and content sharing deals, which it has already started to incorporate in new deals. Viacom is also starting to broaden its distribution partnerships and is getting some traction with new OTT and telecom distribution agreements that could help dampen subscriber loss rates. Viacom's continued ability to reduce leverage and stabilize revenue and EBITDA is highly dependent on how successful these measures are in tempering the secular challenges facing the television industry. In early 2017, Viacom replaced the Paramount management team and implemented a strategy to reduce risk at the studio by focusing on creating films across the production budget landscape, diversifying the genre type to appeal to various audiences and by integrating its films more closely with its media networks brands where possible. Additionally, the new management has focused on building out its television production capabilities, which tends to be less volatile than film. This strategy has staunched the cash flow hemorrhaging at Pramount and could begin to show profitability in 2019. Any improvements toward the segment's natural profitability (5% margins) or peers' profitability (15%) could have a significant impact on the consolidated leverage. Viacom has made progress, as well, in fixing its capital structure and reducing leverage. While leverage at 3.7x remains outside the 3.25x threshold for the current rating, we expect Viacom to reduce adjusted leverage to the 3.5x by fiscal year-end 2018 and to below 3.25 by the middle of 2019. This assumes that Viacom's operating performance stabilizes (see base case below) and the company remains committed to using most of its discretionary cash flow to repay existing debt. We expect it to continue to repay debt with the approximately $1 billion to $1.2 billion of expected discretionary cash flow generation in 2018 and 2019, which coupled with the potential for stable to marginally growing EBITDA will allow the company to further reduce leverage from current levels. Our base-case scenario also reflects the following assumptions:
- U.S. GDP growth of 3% in 2018 and 2.5% in 2019. Advertising revenue is correlated with GDP.
- Revenue decline of 2.5%-3.0% in fiscal 2018, with domestic media networks declining 3% partially offset by close to 10% growth at international media networks.
- Revenue growth of 2.5%-3.0% in fiscal 2019 based on mid-single digit percent growth at international media networks, almost flat revenue at domestic networks, and high-single-digit percent growth at the filmed entertainment segment mainly due to a larger film slate.
- Adjusted EBITDA of about $3 billion in both 2018 and 2019.
- Free operating cash flow of $1.2 billion-$1.3 billion in fiscal 2018 and $1.6 billion-$1.8 billion in fiscal 2019.
- Adjusted leverage to decline to 3.5x by fiscal year-end 2018 and to below 3.25x by mid-2019.
Liquidity
We assess Viacom's liquidity as strong. We don't assess the company's liquidity as exceptional partly due to the very low risk of a change of control put being triggered on about $9 billion of Viacom's bonds. We estimate that Viacom's liquidity sources will exceed uses by over 6x and remain positive even if EBITDA declines by 30%. We estimate that Viacom's liquidity sources will total over $4 billion annually over the next 24 months, including over $350 million in cash on a sustained basis. Given the significant liquidity sources, we expect that the company could absorb low-probability, high-impact events based on its meaningful cash flows and access to its undrawn $2.5 billion revolving credit facility. We believe that the company has well established and solid relationships with banks given that the lead bank has been consistent for years and Viacom's revolving credit facility has only one EBITDA interest coverage covenant. We also believe the company has demonstrated prudent risk management due to its significant debt reduction from internal cash flow generation and the proceeds from the sale of noncore assets. Principal liquidity sources:
- Cash and cash equivalents of about $417 million as of March 31, 2018.
- Full availability under its $2.5 billion revolving credit facility.
- Funds flow from operations of about $1.5 billion-$1.8 billion in fiscals 2018 and 2019.
Principal liquidity uses:
- Working capital needs of about $275 million-$325 million in fiscal 2018 and about $90 million-$115 million in fiscal 2019.
- Annual cash dividends of about $325 million in fiscal 2018 and 2019.
- Debt maturities of $550 million in fiscal 2019.
- Annual capital expenditure of about $200 million in fiscal 2018 and 2019.
Other Credit Considerations
Group influence
Although NAI owns a significant portion of Viacom stock (approximately 10% economic and 80% voting control), we currently assess Viacom as an insulated subsidiary of NAI and do not link our ratings on the two. This is based on the significant stake institutional investors hold in the company and Viacom's fiduciary obligations to act in their best interest. This limits NAI's range of options as a controlling investor, including its ability to take actions that could weaken Viacom's financial risk profile. Our assessment also incorporates the fact that most of Viacom's board members are independent from NAI and that the company maintains separateness from NAI.
Outlook
Although the company has made progress in reducing leverage, the negative outlook reflects the potential for a lower rating if Viacom is unable to reduce adjusted leverage to 3.5x by fiscal year-end 2018 and to below 3.25x by mid-2019.
Downside scenario
We could lower our corporate credit rating on Viacom if the company is unable to reduce leverage as planned, specifically to below 3.5x by fiscal year-end 2018 and to below 3.25x by mid-2019. This could occur if Viacom's initiatives to improve operating performance across its businesses are not successful in countering the secular challenges facing the television ecosystem or if Paramount faces renewed volatility in its film slate results. Alternately, we could tighten our 3.25x leverage threshold for the rating or lower the rating if the company's business trends weaken significantly due to accelerated shifts in the television ecosystem and if it becomes clear that its core networks are no longer key components of the cable bundle. This could occur if its audience ratings decline materially, which over time could lead to advertising revenue declines, pressure on affiliate fees, and depressed segment margins.
Upside scenario
We could revise the outlook to stable if Viacom reduces leverage below 3.25x by mid-2019 and maintains it below that level on a sustained basis. In addition to reducing leverage, Viacom would also need to demonstrate that it is successfully mitigating the secular pressures facing the television ecosystem through its strategic initiatives. This would likely be coupled with domestic operating metrics more in line with U.S. industry peers and a return to at least stable revenue and EBITDA growth.
Ratings Score Snapshot
Corporate credit rating: BBB-/Negative/A-3 Business risk: Satisfactory
- Country risk: Very low
- Industry risk: Intermediate
- Competitive position: Satisfactory
Financial risk: Signigicant
- Cash flow/leverage: Significant
Anchor: bb+ Modifiers
- Diversification/portfolio effect: Neutral (no impact)
- Capital structure: Neutral (no impact)
- Liquidity: Strong (no impact)
- Financial policy: Neutral (no impact)
- Management and governance: Fair (no impact)
- Comparable rating analysis: Positive (+1 notch)
Stand-alone credit profile: bbb-
Issue Ratings--Subordination Risk Analysis
Capital structure
Viacom's capital structure consists of about $8.8 billion in senior unsecured debt and $1.3 billion in junior subordinate debentures as of March 31, 2018.
Analytical conclusions
We rate the senior unsecured debt 'BBB-', the same as the corporate credit rating, because there are no material subordination risks or obligations ranking ahead of the company's senior unsecured debt. The junior subordinated debt is rated 'BB', reflecting the junior position and long-dated maturity, and the commercial paper program is rated 'A-3' based on the 'BBB-' corporate credit rating.
Related Criteria
- Criteria - Corporates - General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings , April 7, 2017
- Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- Criteria - Corporates - Industrials: Key Credit Factors For The Media And Entertainment Industry, Dec. 24, 2013
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Group Rating Methodology, Nov. 19, 2013
- Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013
- Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012
- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
- Criteria - Insurance - General: Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008
Ratings List
Ratings Affirmed; Off CreditWatch/Outlook Action To From Viacom Inc. Corporate Credit Rating BBB-/Negative/A-3 BBB-/Watch Neg/A-3 Ratings Affirmed; Off CreditWatch Viacom Inc. Senior Unsecured BBB- BBB-/Watch Neg Junior Subordinated BB BB/Watch Neg Commercial Paper A-3 A-3/Watch Neg
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
Primary Credit Analyst: | Jawad Hussain, Chicago + 1 (312) 233 7045; jawad.hussain@spglobal.com |
Secondary Contact: | Naveen Sarma, New York (1) 212-438-7833; naveen.sarma@spglobal.com |
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