Fitch Ratings has assigned a 'BBB' rating to NBCUniversal Media, LLC's (NBCUniversal) 2.875% senior unsecured notes due 2023 and its 4.45% senior notes due 2043. NBCUniversal is a direct wholly owned subsidiary of NBC Universal, LLC. (NBCUniversal Holdings) As of June 30, 2012 NBCUniversal had approximately $9.7 billion of debt outstanding.
Proceeds from the $2 billion issuance are expected to be used for general corporate purposes including the redemption of Universal City Development Partners, Ltd.'s (UCDP) 8.875% senior notes due 2015 ($260 million of principal outstanding) and its 10.875% senior subordinated notes due 2016 ($146 million of principal outstanding).
The issuance is in line with Fitch's expectations for NBCUniversal's 'BBB' Issuer Default Rating (IDR). While earlier than anticipated, Fitch believes the company is beginning to accumulate cash to fund an anticipated future redemption of GE's interest in NBCUniversal Holdings. Fitch estimates NBCUniversal has approximately $5.8 billion of cash on a pro forma basis after considering the gross cash proceeds (before tax) received from the sale of NBCUniversal's 15.8% equity interest in A&E Television Networks, LLC, the cash received from the debt issuance (net of the UCDP redemption) and $1.240 billion of cash on hand as of June 30, 2012.
Under the terms of the joint venture operating agreement, GE has the right to cause NBCUniversal Holdings to redeem for cash one-half of its remaining 49% non-controlling equity interest during a six-month period beginning July 28, 2014. GE's then remaining stake in NBCUniversal Holdings can be redeemed during a six-month period starting Jan. 28, 2018.
Total debt outstanding has increased to approximately $11.3 billion on a pro forma basis (compared to $9.7 billion as of June 30, 2012) after considering the effects of the issuance and the UCDP redemption. Pro forma gross leverage as of June 30, 2012 is 2.9x. Fitch expects NBCUniversal's leverage metric will be closely aligned with Fitch's 2.75x gross leverage target for the current rating category. Reinvestment in NBCUniversal's core businesses is the top capital-allocation priority. Beyond this, Fitch expects the company to retain FCF and proceeds from sales of assets and investments to fund future equity redemptions by GE.
Fitch considers NBCUniversal's internally generated liquidity to be strong. NBCUniversal's high conversion of EBITDA into free cash flow is a key consideration supporting the ratings. Based primarily on the strength of its cable network segment, NBCUniversal is expected to generate consistent levels of free cash flow providing the company with significant financial flexibility. During the first six months of 2012, NBCUniversal generated nearly $1.5 billion of free cash flow (defined as cash flow from operations less capital expenditures and dividends).
The company does not have any material maturity scheduled until 2014 when $900 million is scheduled to mature. Fitch expects that during the ratings horizon free cash flow will amount to approximately 8% to 9% of consolidated revenues.
Overall, the ratings incorporate NBCUniversal's size, scale, leading brand positions and diversity of operations and business risk as one of the world's most prominent media and entertainment companies. Central to Fitch's ratings and a key strength of the company's credit profile is NBCUniversal's portfolio of leading cable networks. Fitch considers cable networks one of the strongest subsectors in the media and entertainment industry, providing NBCUniversal with a revenue base largely consisting of stable, recurring and high margin affiliate fee revenue generated from multichannel video programming distributors as well as a significant source of NBCUniversal's free cash flow generation.
Rating concerns center on the secular issues challenging NBCUniversal's broadcast segment, including time-shifting technologies, Internet-based content, and the cyclicality of advertising revenues. Fitch believes that on a total company basis NBCUniversal generates less than half of its revenues from advertising, which is in line with its media peer group. Additional risks to NBCUniversal's operating margin include the company's ability to pass increasing programming costs onto multi-channel video programming distributors. Cable network operators face rising programming costs driven by investments in original content and increasing sports rights fees to enhance the network's competitive position and attract audiences in an increasingly fragmented landscape. Fitch believes the current rating has sufficient capacity to withstand the cyclicality and volatility inherent in NBCUniversal's broadcast and filmed entertainment businesses.
What Could Trigger a Positive Rating Action:
--While Fitch expects improving operating trends will strengthen NBCUniversal's credit profile, positive rating actions are unlikely given the company's obligations related to GE's ownership put rights.
--Strengthening of the implicit linkage of NBCUniversal's ratings to Comcast Corporation as evidenced by Comcast increasing its ownership stake in NBCUniversal and NBCUniversal's growing strategic importance to Comcast.
What Could Trigger a Negative Rating Action:
--In Fitch's view, a downgrade could result from the adoption of a more aggressive financial policy that increases leverage beyond 3.25x on a sustained basis.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)' (Aug. 8, 2012);
--'Rating Global Telecoms Companies' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Rating Telecom Companies
David Peterson, +1 312-368-3177
70 W. Madison Street
Chicago, IL 60602
John Culver, +1 312-368-3216
Bill Densmore, +1 312-368-3125
Brian Bertsch, +1 212-908-0549