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Rating Action:

Moody's changes CME's outlook to stable from positive

10 Jun 2020

Madrid, June 10, 2020 -- Moody's Investors Service, ("Moody's") has today changed to stable from positive the outlook on the ratings of Central European Media Enterprises Ltd. ("CME" or "the company"), a leading free-to-air broadcaster operating in five Central and Eastern European countries.

Concurrently, Moody's has affirmed the company's B1 corporate family rating (CFR) and its B1-PD probability of default rating (PDR).

"The change in outlook to stable reflects our expectation of a weaker TV advertising market owing to the coronavirus outbreak and subsequent global macroeconomic recession, which has removed the possibility of a rating upgrade in the near term," says Víctor García Capdevila, a Moody's AVP-Analyst and lead analyst for CME.

"In addition, the company is still in the process of being acquired by PPF Group, in a transaction that will likely increase CME's leverage. However, there are still a number of unknowns, including whether the transaction will get all necessary approvals, how much debt CME will carry post transaction, and what will be the strategic direction of the company under PPF's ownership," adds Mr. García.

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

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented.

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on CME of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

CME's operating performance is heavily dependent on advertising revenue, from which it derives around 75% of its revenues. Demand for advertising is highly correlated with general economic conditions. Moody's expects the macroeconomic environment to deteriorate rapidly in all countries where CME operates. For example, real GDP growth in CME's two largest countries, the Czech Republic and Romania, where the company generated in 2019 combined revenue and EBITDA of 61% and 76%, respectively, is expected to decrease by 6% and 5%, respectively, in 2020.

Moody's base case scenario assumes that EBITDA will fall between 25%-30% in 2020 due to lower TV advertising revenue as a result of the coronavirus outbreak. Although part of the reduction in advertising revenue will be mitigated by cost savings (mainly content costs and personnel expenses), profitability will still be significantly affected. As a result of this drop in EBITDA, Moody's expects that the company's leverage on a standalone basis, prior to the acquisition by PPF Group, will stand at around 3.3x by year end 2020.

Furthermore, the company is currently in the process of completing its takeover by PPF Group, which was announced in October 2019, and which is expected to close in Q3 2020. Although PPF made public its intention to finance the acquisition with a mix of equity and debt, with the debt component consisting of €1,150 million, including a revolving credit facility [1], there are still several unknowns, such as whether the transaction will get the necessary approvals, how much debt will ultimately sit on CME's balance sheet versus other entities within the PPF Group and the operational and strategic direction as well as financial policies that PPF will implement once it fully owns CME.

The rating agency believes that the downside risks related to the coronavirus outbreak along with the uncertainties around CME's acquisition by PPF make a rating upgrade unlikely in the near term and that is why the outlook has been changed to stable from positive. However, Moody's will reassess the credit quality and rating positioning of CME if and when the transaction closes and some of the pending uncertainties are cleared.

Moody's continues to draw comfort from CME's (1) strong operating and financial performance over the last few years; (2) solid market positioning, with leading audience and market share in all operating segments; (3) high and recurring free cash flow generation; (4) improved revenue visibility thanks to higher carriage and subscription fees; and (5) a more flexible cost structure than in the previous economic downturn, largely due to the shift to local content and away from Hollywood studios.

LIQUIDITY

CME's liquidity profile is good. It is supported by a cash balance of $140 million as of the end of Q1 2020, full availability under its $75 million revolving credit facility and Moody's estimate of an annual free cash flow generation of around $90 million in 2020. Moody's estimates that these sources are enough to meet its cash requirements over the next 12-18 months, including the outstanding €60m loan maturing in April 2021. CME does not have any large debt maturity repayment until November 2023 when €469 million are due.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects that while the company's credit metrics and cash flow generation will weaken owing to the impact of the coronavirus outbreak and subsequent macroeconomic recession, they will remain well positioned for the B1 rating prior to any additional leverage resulting from the acquisition by PPF Group.

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

Positive ratings pressure is unlikely in the near term given the downside risks related to the coronavirus outbreak and the knock-on effects on TV advertising spending and the uncertainties around PPF Group's acquisition of CME. Overtime, a rating upgrade is possible if CME's Moody's-adjusted gross debt/EBITDA remains sustainably below 3.5x and its adjusted FCF/gross debt increases towards 7% - 10% on a sustained basis.

Negative rating pressure could develop if earnings deteriorate leading to a Moody's-adjusted gross leverage increasing above 5.0x, free cash flow to gross debt decreases below 5% on a sustained basis or liquidity deteriorates.

LIST OF AFFECTED RATINGS

..Issuer: Central European Media Enterprises Ltd.

Affirmations:

....Probability of Default Rating, Affirmed B1-PD

....Corporate Family Rating, Affirmed B1

Outlook Action:

....Outlook, Changed To Stable From Positive

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Media Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1077538. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Central European Media Enterprises Ltd. (CME) is a media and entertainment company incorporated in Bermuda. The company has broadcast operations in five Central and Eastern European countries, Czech Republic, Romania, Slovakia, Bulgaria and Slovenia, serving an aggregate population of around 45 million people. Launched in 1994, CME operates 30 TV channels. In the last 12 months ended in March 2020, the group generated revenue and OIBDA of $692 million and $247 million, respectively.

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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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 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.

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 www.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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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

REFERENCES/CITATIONS

[1] Merger/Acquisition agreement 28-Oct-2019 (https://www.ppf.eu/en/press-releases/ppf-obtains-eur-1150-billion-financing-for-acquisition-of-cme)

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.

Victor Garcia, CFA
AVP-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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