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Rating Action:

Moody's affirms Bertelsmann's Baa1 ratings; outlook stable

22 May 2019

Madrid, May 22, 2019 -- Moody's Investors Service ("Moody's") has today affirmed the Baa1 issuer rating of Bertelsmann SE & Co. KGaA ("Bertelsmann" or "the company"). Concurrently, Moody's has affirmed the company's Baa1 senior unsecured ratings, the (P) Baa1 senior unsecured MTN programme rating, the Baa3 junior subordinated notes rating and the Prime-2 (P-2) short term issuer rating. The outlook is stable.

"The ratings affirmation reflects Bertelsmann's good set of Q1 2019 results, which showed the highest quarterly revenue growth rate since 2008. In addition, the rating continues to reflect the substantial size and scope of Bertelsmann's activities, its strong and established positions in a number of diverse and geographically diversified markets, the growth potential from its ongoing investments, and its predictable financial policy," says Agustin Alberti, Moody's Vice President -- Senior Analyst and lead analyst for Bertelsmann.

"However, the company is weakly positioned within its rating category due to (1) its weak credit metrics, which leave no headroom for operating underperformance or debt-financed acquisitions, (2) the structural challenges affecting its broadcasting business, and (3) its exposure to the cyclicality of the advertising sector," adds Mr. Alberti.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The Baa1 rating acknowledges the substantial size and scope of Bertelsmann's activities as well as its strong and established positions in a number of diverse and geographically diversified markets, including pan-European leadership in advertising-based broadcasting (RTL) and a leading position in international book publishing (Penguin Random House or "PRH"). Moreover, the rating factors in Bertelsmann's clearly defined and predictable financial policy and the company's stated commitment to maintaining a Baa1 rating.

Constraining factors for the rating include the group's exposure to the structural challenges affecting its broadcasting business, where increasing competition from over-the-top content distributors, including Netflix, Inc. (Netflix, Ba3 stable), is leading to a fragmentation of audiences and an acceleration in the reduction of the free-to-air viewing time. In addition, the group remains exposed to the advertising cycles.

Bertelsmann is focused on executing its well-defined strategy and continues to invest in growth businesses to bolster overall group revenue growth and diversify into new businesses. However, the fast growing small-sized businesses that Bertelsmann is acquiring (or may look to acquire) generally trade at high EBITDA multiples, while their immediate EBITDA contribution is not significant, impacting negatively credit metrics in the short term. In addition, the investments required in the high growth businesses are putting some pressure on EBITDA margins.

Consequently, Bertelsmann's credit metrics remain weak for the Baa1 rating, with Moody's adjusted debt/EBITDA at 3.3x and Moody's adjusted retained cash flow (RCF)/Net Debt at 20.6% as of December 2018. In addition, Bertelsmann's consolidated metrics are bolstered by the fact that the company fully consolidates subsidiaries that are not fully owned, such as RTL (75.1% ownership) and PRH (75% ownership). Bertelsmann nevertheless strives to keep its reported leverage ratio below its ceiling of 2.5x on a sustained basis.

Moody's expects the company to manage its discretionary cash outflows related to acquisitions or further portfolio optimization in 2019 and beyond such that Moody's threshold ratios for the rating (RCF/Net Debt in the mid-twenties, free cash flow (FCF)/Net Debt of at least around 10% and adjusted debt/EBITDA below 3x) are respected.

Bertelsmann has a good liquidity profile, with cash and cash equivalents of €1.4 billion at the end of 2018. The company also has access to a €1.2 billion syndicated revolving bank facility (expiring in 2021), which is currently undrawn. The high cash balance, together with operational cash generation and availability under the company's RCF, provide ample flexibility to repay upcoming debt maturities at least over the next two years.

RATIONALE FOR STABLE OUTLOOK

The stable outlook on Bertelsmann's rating reflects Moody's expectation that the company's revenue and EBITDA will perform in accordance to company guidance in 2019. The stable outlook also assumes that Bertelsmann will manage its discretionary cash outflows in 2019 and beyond, such that it can achieve and sustain credit metrics in line with Moody's guidance for the Baa1 rating. However, the rating is weakly positioned, leaving no headroom for underperformance or debt-financed acquisitions.

WHAT COULD CHANGE THE RATING UP/DOWN

While Moody's does not see a catalyst for a near-term upgrade, the following could result in upward pressure over time: (1) evidence that the group's transformation is leading to good levels of organic growth and higher profitability; and (2) the company's RCF-to-net debt ratio moving towards 30% and free cash flow-to-net debt in mid-teen percentages.

The rating could come under downward pressure if Bertelsmann (1) fails to deliver a steady operating performance; (2) fails to maintain an adjusted RCF-to-net debt ratio (as defined by Moody's) in the mid-20s in percentage terms, a FCF-to-net debt ratio at around 10% and a gross debt-to-EBITDA ratio below 3.0x on a sustained basis; and/or (3) was to loosen its financial comfort parameters (Bertelsmann leverage factor limit is below 2.5x).

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Bertelsmann SE & Co. KGaA

.... ST Issuer Rating, Affirmed P-2

.... LT Issuer Rating, Affirmed Baa1

....Junior Subordinated Regular Bond/Debenture, Affirmed Baa3

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

Outlook Actions:

..Issuer: Bertelsmann SE & Co. KGaA

....Outlook, Remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Bertelsmann SE & Co. KGaA, headquartered in Gutersloh, Germany, is a large media, services and education company that operates in about 50 countries and employs 117,000 people. In 2018, Bertelsmann reported consolidated revenue of €17.7 billion and operating EBITDA of €2.6 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Agustin Alberti
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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