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Rating Action:

Moody's assigns Baa3 rating to Bertelsmann's proposed junior subordinated notes

08 Apr 2015

London, 08 April 2015 -- Moody's Investors Service has assigned a Baa3 rating to the proposed EUR junior subordinated notes of benchmark size to be issued by Bertelsmann SE & Co. KGaA ('Bertelsmann' or 'the company'). At the same time, the agency has affirmed at Baa1 with a stable outlook the senior unsecured ratings and the issuer ratings of Bertelsmann and its rated subsidiary RTL Group SA. The agency has also affirmed the P-2 short term issuer rating of Bertelsmann.

"The Baa3 rating we have assigned to the hybrid debt is two notches below Bertelsmann's senior unsecured rating of Baa1, primarily because the instrument is deeply subordinated to other debt in the company's capital structure," says Gunjan Dixit, a Moody's Vice President and lead analyst for Bertelsmann.

Despite material weakness in its credit metrics for 2014, the affirmation of Bertelsmann's Baa1 ratings with a stable outlook, is based on Moody's expectation that the company's reported revenue and EBITDA will grow modestly in 2015 helped by the company's recent acquisitions/capital investments, and that it will manage its discretionary cash outflows in 2015 and beyond such that it can achieve and sustain credit metrics in line with Moody's guidance for the Baa1 rating. The rating agency will continue to be somewhat tolerant to weakness in Bertelsmann's credit metrics that is caused by the effects of discount rates on the company's IAS19 pension deficit.

RATINGS RATIONALE

The Baa3 rating is two notches below the company's senior unsecured ratings of Baa1. The two-notch rating differential reflects the deeply subordinated nature of the hybrid debt. The instruments (1) have a maturity in 60 years; (2) are senior only to common equity and pari-passu with the Genussscheine issued in 1992 and 2001; and (3) provide Bertelsmann with the option to defer coupons on an indefinite, cash cumulative and non-compounding basis.

In Moody's view, the notes have equity-like features that allow them to receive basket "C" treatment (i.e., 50% equity and 50% debt for financial leverage purposes) (please refer to Moody's Cross-Sector Methodology "Hybrid Equity Credit" of March 2015).

Bertelsmann plans to use the hybrid debt for general corporate purposes, to support its strategy, and to diversify and strengthen its capital structure. The hybrid will allow Bertelsmann to restore and build on its financial flexibility after its 2014 investments. Including financial debt assumed, Bertelsmann invested EUR1.6 billion in 2014 (compared to EUR2.0 billion in 2013), mainly in the acquisitions of Relias Learning, SpotXchange and StyleHaul, Santillana, and the Netrada group. There were also acquisitions of music catalogues and packages of film rights. Bertelsmann largely funded its investments by utilizing its cash and cash equivalents that were boosted by the proceeds (EUR1.5 billion gross) from the 2013 sale of a 16% stake in RTL. All acquisitions were in line with Bertelsmann's business strategy and are likely to foster incremental revenue and EBITDA growth over time.

Growth potential for Bertelsmann's current stable of activities remains modest. In 2014, Bertelsmann's revenues grew by 3.1% (compared to 0.7% in 2013) on a reported basis but declined by 1% organically (compared to a decline of 2.8% in 2013) to EUR16.7 billion. Moody's expects 2015 reported revenue for Bertelsmann to show modest growth and its operating EBITDA to show an improvement helped by restructuring efforts as well as the contribution from Bertelsmann's investments in growth platforms.

Bertelsmann aims to expand its revenues to around EUR20 billion and increase its group profit to over EUR1 billion (from EUR573 million in 2014) by around 2020. While Bertelsmann's current restructuring initiatives and the consolidation of recent acquisitions, will likely contribute toward its growth targets, the company could rely on making additional acquisitions of growth businesses (that are coherent with its strategy) in order to achieve its objectives, in Moody's opinion. Accordingly, Moody's cautiously takes into account the risks related to over-payment for potential acquisition targets and possible integration risks.

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 likely not as significant for Bertelsmann. Therefore, Bertelsmann's credit metrics could initially be negatively affected while it pursues its acquisition strategy.

In 2014, Bertelsmann's credit metrics were considerably weaker (i.e., Moody's adjusted gross debt/EBITDA at 3.3x, retained cash flow (RCF)/net debt at 16.9%, and Free Cash Flow (FCF)/net debt at --1.70%) compared with Moody's guidance for ratings maintenance. A meaningful portion of the operating cash flow generated in 2014 was absorbed by the exceptional restructuring in addition to outflows for dividends and capex. Moreover, the acquisition expenditure during the year was relatively high. This led to an increase in reported net debt to EUR1.69 billion in 2014 (compared to EUR681 million in 2013). The increase in Bertelsmann's IAS19 pension deficit also contributed meaningfully to the weakness in ratios. The deficit increased to EUR2.6 billion in 2014 compared to EUR1.8 billion in 2013.

Bertelsmann pursues a clearly defined set of financial goals, most notably the "Leverage Factor" ratio as defined by Bertelsmann (Economic Debt i.e. net financial debt plus provisions for pensions, profit participation capital and net present value of operating leases in relation to operating EBITDA). For 2014, the ratio stood at 2.7x (compared to 2.0x in 2013) higher than the 2.5x ceiling Bertelsmann targets for this ratio. In 2015, Moody's expects Bertelsmann to prioritize de-leveraging such that it can achieve a leverage ratio in line with its target.

The agency expects Moody's adjusted credit metrics for Bertelsmann to improve in 2015 as restructuring-related expenses are likely to drop-off significantly given that it completed the majority of its restructuring initiatives in 2014. In addition, Bertelsmann's M&A spending is expected to be lower in 2015 than 2014, during which the company invested heavily. Moody's expects Bertelsmann to manage its discretionary cash outflows in 2015 and beyond such that Moody's target ratios for the rating are respected.

RATIONALE FOR STABLE OUTLOOK

A stable rating outlook is based on Moody's expectation that Bertelsmann will remain on path to deliver modest organic revenue growth and that the company's operating EBITDA margin (as calculated by Bertelsmann) will show slight improvement in 2015 (compared to 14.2% in 2014). Moody's also expects that any portfolio changes in the context of the company's evolving strategy, as well as acquisitions, will be managed such that metrics supportive of the Baa1 rating can be maintained.

WHAT COULD CHANGE THE RATING DOWN-UP

Bertelsmann's ratings could come under negative pressure, if it were (1) unable to deliver a steady operating performance; (2) unable to maintain ratios of adjusted RCF/net debt (as defined by Moody's) in the mid twenties, FCF/net debt at least around 10% and gross debt/EBITDA below 3.0x on a sustained basis; and/or (3) to loosen its financial comfort parameters (Bertelsmann leverage factor limit is below 2.5x).

While Moody's does not see a catalyst for a near-term upgrade, good levels of organic growth, improved profitability and adjusted RCF/net debt moving towards 30% and FCF/net debt in the mid teens could result in upgrade pressure over time.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Large Global Diversified Media Industry published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Guetersloh, Germany, Bertelsmann is a large, diversified media and media services company that operates internationally.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Gunjan Dixit
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns Baa3 rating to Bertelsmann's proposed junior subordinated notes
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