Fitch Ratings has affirmed the Issuer Default Rating (IDR) and senior unsecured debt ratings for News Corporation (News Corp.) and its wholly owned subsidiaries, News America Incorporated (NAI) and News America Finance Trust II. The Rating Outlook is Stable. (See full ratings list below.)
Overall, Fitch's ratings on News Corp. continue to recognize the company's size and scope as one of the largest global media and entertainment companies, with solid market positions in broadcast and cable television (TV), filmed entertainment, newspapers, and direct broadcast satellite (DBS) distribution. Fitch believes News Corp.'s credit-protection measures, strong free cash flow (FCF) and solid liquidity make the credit profile strong for the rating category. Rating concerns center on the secular challenges facing the newspaper, magazine and local TV broadcasting businesses.
Performance in every sub-sector has been extremely solid over the last several years. At its cable networks, the company has benefited from sustained audience share growth. Strong ratings at the main cable networks (Fox News and FX) should continue to translate into pricing power with cable multiple system operators (MSOs) as more carriage contracts come up for renewal. As the carriage revenue streams are very stable and incrementally high margin, Fitch expects them to predominantly offset weakness in advertising sales on the cable networks over the short term.
The company has also benefited from the performance of its filmed entertainment segment which is estimated to have industry-leading margins in at least its movie studio (different reporting standards from the studios make an exact comparison difficult). The segment has outperformed much of the industry due to producing and/or acquiring lower cost material that has generated revenues equivalent or better than larger productions. Fitch estimates releases such as Juno, Borat, the Ice Age franchise, Devil Wears Prada, Alvin and the Chipmunks, The Simpsons, and several others far exceeded their total production and print & advertising spend. While results for this segment have been extremely consistent over the last five years, Fitch's ratings take into account the potential volatility of the Filmed Entertainment business (both movie and television).
Fitch's ratings also incorporate cyclical weakness in TV advertising. We expect acute pressure from both cyclical and secular issues in local advertising (owned & operated [O&O] stations), which Fitch estimates accounts for less than 10% of overall EBITDA. While we expect a difficult advertising environment for the broadcast network compared to prior years, longer term, in Fitch's view, national advertising is more likely to rebound from current cyclical weakness.
Fitch estimates that over 20% of News Corp's EBITDA is related to print products. While reported EBITDA for the print businesses has been relatively resilient over the last few years (also benefiting from a weak U.S. dollar and consolidations), Fitch is cautious that the UK and Australian newspaper and magazine markets could begin to exhibit more pronounced secular pressures, as experienced in the U.S. recently. A weakening pound could also add to difficult results for the newspaper segment.
Despite various cyclical and secular challenges, News Corp has significant capacity at its current 'BBB' rating. Gross debt-to-operating EBITDA is strong at 2.0 times (x) for the latest 12 months (LTM) ended Sept. 30, 2008 and the company's liquidity is substantial with $5.5 billion in cash and its entire $2.25 billion of revolver available.
Management's statement's regarding fiscal discipline during this downturn also support the ratings. The company's maturity schedule is manageable with no material maturity dates over the next few years; however, it is possible that holders of $1.7 billion in exchangeable securities could tender their securities in March 2010. While share repurchase activity was significant over the last three years, the company has since halted share buybacks due to the existing difficult economic environment. Even on potentially weakening results, Fitch notes that as more visibility emerges over the next 12-24 months regarding the depth and duration of the economic downturn, correlation of cashflows (both segment and geographic), acquisition appetite and capital structure management, it is possible the rating could be considered for an upgrade.
Fitch affirms News Corp. and its subsidiaries as follows:
News Corp.
--Issuer Default Rating (IDR) 'BBB'.
News America, Inc.
--IDR 'BBB';
--Senior unsecured 'BBB'.
News America Finance Trust II
--IDR 'BBB';
--BUCS senior exchangeable securities 'BBB'.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.
Contacts:
Fitch Ratings
Jamie Rizzo, CFA, 212-908-0548, New York
Mike
Simonton, CFA, 312-368-3138, Chicago
or
Media Relations:
Cindy
Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com