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Rating Action:

Moody's assigns Ba2 CFR to Rovi; Outlook is stable

25 Jan 2011

Approximately $600 million of rated debt affected

New York, January 25, 2011 -- Moody's Investors Service has assigned a Ba2 Corporate Family Rating (CFR) to Rovi Corporation ("Rovi" or the "Company"), and Ba1 ratings to the Company's $600 million of proposed credit facilities consisting of two tranches of term loans with 5 and 7 year maturities. Rovi's two wholly-owned subsidiaries, Rovi Solutions Corporation and Rovi Guides, Inc., are expected to be co-borrowers under the proposed credit facilities which will be guaranteed by Rovi Corporation. The proceeds from the term loan offering will be used for general corporate purposes. Separately, Rovi expects to complete the purchase of Sonic Solutions for approximately $764 million in cash and stock during the first quarter of 2011. As part of the rating action, Moody's also assigned an SGL-1 short-term rating to the Company. The outlook for ratings is stable.

Moody's assigned the following ratings:

Issuer: Rovi Corporation

.... Corporate Family Rating -- Ba2

.... Probability of Default Rating -- Ba2

.... Senior Secured Bank Credit Facilities (Rovi Solutions Corporation and Rovi Guides, Inc., as co-borrowers) -- Ba1, LGD2, 28 %

....Outlook -- Stable

. Speculative Grade Liquidity -- SGL-1

RATINGS RATIONALE

The Ba2 CFR reflects the strong market position of Rovi's interactive program guides (IPG) offerings underpinned by its broad portfolio of patents and the Company's large recurring revenues generated from licensing of IPG patents and copy protection technologies. Rovi's high EBITDA margins coupled with good EBITDA-to-free cash flow conversion enable the Company to generate strong free cash flows. The rating is supported by management's commitment to reduce debt-to-EBITDA leverage to less than 3.0x (total debt to Company's adjusted EBITDA) within a year after the close of Sonic acquisition, Rovi's very good liquidity, and successful business execution in shifting the Company's focus from a mature analog copy protection market to a rapidly growing market for digital media technology solutions. The rating benefits from favorable end-market trends, including an expanding customer base of digital TV subscribers resulting from analog-to-digital TV conversion, and the growth in Internet-enabled media devices on which search and discovery features could enhance viewers' experiences and add-on services could be provided. Moody's believes that Rovi is favorably positioned to grow revenues leveraging its portfolio of intellectual property and a combination of products in guidance, metadata and content security.

However, the rating is constrained by Rovi's moderate scale and debt-to-EBITDA leverage, and the potential for acquisitions, which Moody's believes will remain an integral part of the Company' strategy to expand its technology and product portfolio. The rating also considers Rovi's eventual challenges to maintain a commercially relevant patent portfolio as important patents expire. Additionally, in Moody's opinion, rapidly evolving technology and business models for distribution of content will provide both new opportunities and a broad set of competitive challenges. Moody's believes that as Rovi pursues significant advertising revenue opportunities (not presently factored into our current projections), its business risk could increase with growing exposure to a deeply cyclical and intensely competitive market for advertising display. Currently Rovi's key competitors include its customers who develop their own guide product by licensing Rovi's intellectual property, as well as other guide product providers. Rovi could face growing challenges in the long term from its customers who may develop their own user interfaces by designing around Rovi's patents in order to capture a larger share of advertising revenues.

The stable rating outlook incorporates Moody's expectation that Rovi's leverage would decline to less than 3.0x by mid-2012, driven by strong organic revenue and EBITDA growth, and debt reduction. Moody's expects the Company's share repurchases and acquisition strategies to remain consistent with its management's commitment to maintain a solid liquidity profile and a moderately levered balance sheet.

Moody's assigned a Ba1 rating with a loss-given default assessment of LGD2 (28%) to Rovi's proposed senior secured credit facilities reflecting the lenders' first priority security interest in the collateral pool and realization proceeds, and the presence of a meaningful layer of effectively junior debt comprised of senior convertible notes in the capital structure.

The SGL-1 liquidity rating mainly considers Rovi's strong cash balances, including domestically held cash, the expectations of strong free cash flow generation over the next 12-to-18 months, and modest levels of scheduled debt repayment requirements over this period. The Company principally relies on its cash and cash flow generation for liquidity requirements and does not presently maintain a revolving credit facility.

What could change rating - Up

Moody's could raise Rovi's outlook or ratings if the Company's operating performance remains strong and management commits to maintaining a more conservative and stable fiscal policy. Specifically, Rovi's ratings could be raised if the Company sustains debt-to-EBITDA leverage of less than 2.0x (Moody's adjusted), while continuing to pursue revenue growth opportunities to keep pace with the rapidly changing industry, without dramatic impact on the Company's credit profile.

What could change rating - Down

Rovi's ratings could be downgraded if the Company's debt-to-EBITDA leverage remains above 3.0x (about 3.3x Moody's adjusted total debt/EBITDA) by mid-2012. In addition, a deterioration of Rovi's liquidity, which is mainly comprised of cash balance and free cash flows, could trigger a rating downgrade. Downward rating pressure could also develop if the Company's market position is undermined as a result of declining commercial relevance of its patents, if competitors successfully challenge Rovi's intellectual property rights, or if the Company loses a key service provider or CE manufacturer relationship, which results in material revenue losses.

The principal methodologies used in this rating were Global Software Industry published in May 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Headquartered in Santa Clara, California, Rovi Corporation provides integration solutions for digital media entertainment, primarily to service providers and consumer electronics manufacturers. The Company has a broad patent portfolio spanning display of and interaction with TV program guides and video copy protection technology. Rovi reported revenues of $542 million in the LTM 3Q 2010 period.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Raj Joshi
Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Neil Begley
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Ba2 CFR to Rovi; Outlook is stable
No Related Data.
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