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Rating Action:

Moody's assigns first-time Baa1/P-2 ratings to Universal Music Group; stable outlook

31 May 2022

Madrid, May 31, 2022 -- Moody's Investors Service ("Moody's") has today assigned a first-time Baa1 long-term issuer rating and a Prime-2 (P-2) short-term issuer rating to Universal Music Group N.V. ("UMG", "Universal" or "the company"). Concurrently, Moody's has assigned a P-2 rating to the proposed €1.0 billion commercial paper programme issued by UMG. The outlook on all ratings is stable.    

     

"The Baa1 rating reflects the company's strong operating momentum supported by the secular growth prospects of the music industry fueled by increasing consumer adoption of on-demand music streaming platforms, social media apps and other emerging digital platforms," says Agustin Alberti, a Moody's Vice President - Senior Analyst and lead analyst for UMG.

"The rating is also supported by UMG's prudent financial policy as reflected by its current low leverage and the public commitment to a solid investment grade rating," adds Mr. Alberti.

Financial strategy and risk management as well as changing demographic and societal trends are governance and social considerations, respectively, under Moody's General Principles for Assessing Environmental, Social and Governance Risks Methodology for assessing ESG risks.

A full list of affected ratings is provided towards the end of the press release.

RATINGS RATIONALE

The Baa1 rating reflects: (1) UMG's  position as the world's leading music company with steady market shares; (2) the ongoing transition to a more predictable and recurring revenue profile based on the growth of streaming and publishing revenues; (3) the secular tailwinds for the global music industry's long-term growth fueled by strong consumer adoption of paid subscription streaming services, social media apps and emerging digital platforms that Moody's expects to continue, particularly in emerging markets; (4) its good track record in supporting and developing artists careers through its global network of iconic labels and publishing companies covering 200 markets; (5) a best-in-class music catalog with good geographic diversity and monetization opportunities; (6) an experienced management team with a proven track record of adapting to new trends through innovation; and (7) a solid financial profile supported by strong underlying free cash flow generation (excluding catalog content acquisitions) and relatively low gross leverage levels of slightly below 2.0x for the next two years.

The rating also reflects: (1) the continued need for investments in artists to secure new hits and therefore maintain its leading position and market share; (2) the increasing competition from the emergence of financial players looking to buy and monetize music catalogs resulting in more expensive acquisition multiples; (3) the long term risk of disintermediation from new tech platforms offering the artists direct access to consumers, which Moody's considers to be limited given the value provided by labels to artists; (4) the volatility in free cash flow generation depending on the company's music content acquisition spend; (5) the risks related to evolving technologies which in the past have prevented the company from monetizing its content, although Moody's does not foresee any material technology disruption over the rating horizon and; (6) the lack of track record operating as a standalone entity separated from  Vivendi SE ("Vivendi", Baa2 negative) and the need to develop a track record as a rated entity.

Moody's expects that the industry will sustain a mid single digit rate annual revenue growth in the next two years driven by continued strong secular adoption of paid digital music streaming services by consumers, especially in underpenetrated emerging markets. Demand will also be supported by emerging digital platforms, including popular social media apps, online interactive video games, digital fitness, physical and mental health, connected cars, and other interactive services that stream media to users remotely. As artists look for new interactive ways to make connections with their fans, further monetization areas are emerging from non fungible tokens ("NFTs") and blockchain innovations, and from the new opportunities provided by the metaverse and web 3.0.

The rating agency estimates that the company will increase its annual revenues in line with the industry, at a mid single digit rate, mainly driven by the growth of subscription and streaming revenues, but also thanks to the recovery of the merchandising segment, driven by a return to touring.

Moody's projects UMG's EBITDA to grow at a similar pace, with a relatively stable EBITDA margin for the next two years because some of the revenue recovery will come from low margin merchandising segment, and to reflect inflationary pressures that could prevent the company from expanding margins in the short term. There is potential for margins to keep expanding in the medium term as digital revenues continue increasing their contribution. The company targets mid-twenties adjusted EBITDA margin in the medium term, supported by high single digit revenue growth and continued cost control.

The rating agency expects gross debt to EBITDA (as defined by Moody's) to remain slightly below 2.0x in 2022 and 2023, compared to 1.9x in 2021.

Despite strong growth in cash flow from operations, the company has reported negative free cash flow in the last three years because of the significant investments in catalogue acquisitions and dividend payments. The rating agency expects FCF and credit metrics to improve significantly driven by revenue  growth,  and lower catalogue acquisition activity expected by Moody's of around €350 million per year from 2023 onward, compared with an average of €530 million during the 2019-2021 period. However, catalogue investments are difficult to predict depending on sale opportunities coming to the market. Therefore, FCF generation and credit metrics may finally vary depending on the company's acquisition activity.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

UMG's exposure to environmental risks is low because of the nature of its media activities.

Social considerations mainly relate to changing demographic and social trends arising from listeners' rapid migration to on-demand music streaming platforms and social media apps, which benefits UMG given the increasing demand for its music content.

In terms of governance considerations, Universal has a limited track record as an independent company since it was spun off from Vivendi and listed in 2021. However, the company benefits from an experienced management team and has stated its commitment to a solid investment grade rating with a medium term policy to maintain net leverage levels (as reported by the company) between 1.0x and below 2.5x, compared to 1.2x by year end 2021. Although UMG is publicly listed, the company is under significant influence from major shareholders (Consortium led by Tencent Holdings Limited ["Tencent", A1 stable], Vivendi, Bolloré entities), representing 48% of total voting rights. These shareholders have entered into a relationship agreement, including the right for the Tencent-led Consortium to maintain up to two non-executive directors on the Board until 2024, subject to it holding a certain minimum interest, and a dividend policy consisting of distributing a 50% net income pay-out.

LIQUIDITY

UMG's has good liquidity, supported by cash and cash equivalents of €585 million as of year end 2021, access to a €2.0 billion RCF, of which €533 million was available as of year end 2021, and by improving free cash flow generation which Moody's expects to turn positive from 2023 owing to reduced content acquisition spend. Issuance under the proposed €1.0 billion commercial paper programme will be used to refinance existing debt.

The company also holds equity stakes in Spotify and Tencent Music Entertainment Group which are liquid and could provide extra liquidity if needed.

The RCF and the €1.0 billion Term Loan, maturing in 2026, have significant capacity under its 4.0x net debt/EBITDA covenant (tested in June and December) as the ratio was 1.2x as of year-end 2021. The covenant is activated if the long term issuer rating stands below Baa2. An additional covenant limits acquisition of contents to below €500 million over the last 12 months of any testing date.

RATIONALE FOR STABLE OUTLOOK

The stable outlook assumes that the company will continue to benefit from its leading position in a growing music industry and will maintain a prudent financial policy, resulting in credit metrics consistent with the Baa1 rating.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward pressure on the rating would require the company to keep its solid operating performance while maintaining, on a sustained basis (1) gross debt/EBITDA (Moody's-adjusted) below 1.75x and retained cash flow/net debt (Moody's-defined) comfortably above 30%.

Downward pressure could develop if there is deterioration in the company's business model that results in a material, sustained erosion of its leading market position, profitability or cash flow generation. The ratings could also face downward pressure if management adopts a more aggressive financial policy, undertakes sizeable acquisitions or finances large share buybacks with debt, leading to (1) a gross debt/EBITDA deteriorating above 2.75x on a sustained basis, and (2) a RCF/net debt ratio sustainably below the mid twenties.

LIST OF AFFECTED RATINGS

Assignments:

..Issuer: Universal Music Group N.V.

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

.... LT Issuer Rating, Assigned Baa1

....Commercial Paper, Assigned P-2

Outlook Action:

....Outlook, Assigned Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356424. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

COMPANY PROFILE

Universal Music Group N.V. is the world's leading music company, with a broad array of businesses engaged in recorded music, music publishing, merchandising and audiovisual content with offices in more than 60 countries covering 200 markets. The company is listed in the Amsterdam stock exchange since 2021. Its main shareholders are a consortium led by Tencent Holdings Limited (20% equity stake); Groupe Bolloré (18%), Vivendi SE (10%), Pershing entities (10%) and free float (42%). In 2021, UMG reported revenues of €8.5 billion and adjusted EBITDA of c. €1.8 billion.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 issuer/deal page for the respective issuer on https://ratings.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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.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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