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Rating Action:

Moody's changes the outlook of Getty Images to Negative from Stable; affirms B3 CFR

15 Dec 2014

$2.5 billion of rated debt affected

New York, December 15, 2014 -- Moody's Investors Service ("Moody's") changed the rating outlook of Getty Images, Inc. ("Getty Images") to negative from stable due to continuing declines in Midstock revenue and Moody's revised forecast indicating very high leverage over the next 12 months with reduced free cash flow. Moody's affirmed the B3 Corporate Family Rating, B3-PD Probability of Default Rating, and instrument ratings as summarized below.

Outlook Actions:

..Issuer: Getty Images, Inc.

....Outlook, Changed To Negative From Stable

Affirmations:

..Issuer: Getty Images, Inc.

.... Probability of Default Rating, Affirmed B3-PD

.... Corporate Family Rating (Local Currency), Affirmed B3

.Issuer: Getty Images, Inc. and Abe Investment Holdings, Inc.

....$150 million 1st Lien Sr Secured Revolver due 2017: Affirmed B2, LGD3

....1st Lien Sr Secured Term Loan due 2019: Affirmed B2, LGD3

....$550 million of 7.0% Senior Unsecured Notes due 2020: Affirmed Caa2, LGD6

RATINGS RATIONALE

Getty Images' B3 corporate family rating reflects very high leverage with debt-to-EBITDA of 8.0x as of September 30, 2014 (including Moody's standard adjustments) and reduced free cash flow-to-debt over the next 15 months due to tax restructuring payments only partially offset by a one-time $20 million tax refund. Despite revenue gains reported in 3Q2014 for editorial stills and video segments, we expect leverage to remain elevated at more than 7.5x over the next 12 months reflecting continued investments in growth including marketing and technology. The increase in leverage compared to 7.1x as of June 30, 2013, reflects persistent revenue declines in the Midstock segment since the second half of 2012 compounded by increased operating expenses from stepped up investments in personnel, marketing, and technology largely aimed at positioning the Midstock segment to be more competitive. The operating performance of Getty Images is well below its plan presented in the October 2012 buyout which underestimated the impact of aggressive competition in Midstock and a soft global economy, particularly in Europe.

Management indicates that locked-in, recurring subscription revenue has increased to more than 25% of total revenue and that initial results of the re-launch of iStock.com are encouraging given improving volumes; however, timing for a rebound in Midstock revenue remains uncertain. Moody's notes the continuing decline in Midstock revenue is in contrast to the track record of competitors, including Shutterstock (publicly traded) and Fotolia, to grow their stock photo revenue by high double digit percentages. We expect competition in stock photography to remain elevated given Shutterstock's rapidly increasing global market share and Fotolia's agreement to be acquired by deep-pocketed Adobe Systems Incorporated (Baa1 stable) for roughly $800 million. Moody's also expects investments in marketing and technology to remain competitive which will reduce Getty Images' ability to grow EBITDA margins above current levels which is 4% to 5% below margins achieved leading up to the October 2012 buyout. The negative outlook reflects Moody's view that Getty Images is very weakly positioned in the B3 rating with leverage of 8.0x, and we expect leverage to remain above 7.5x over the next 12 months (including Moody's standard adjustments). Results through the first half of 2014 were in line with Moody's expectations; however, overall results in the second half of 2014 are suffering from the inability to restore growth to the Midstock segment evidenced by a 9.8% quarter-over quarter decline in 3Q2014 Midstock revenue and uncertainties regarding timing for a rebound. Moody's believes the company will need more time to improve leverage to levels we forecasted at the end of 2013. Growth in free cash flow will also be limited due to recently announced tax restructuring payments totaling $63 million through 1Q2016, only partially offset by a $20 million one-time tax refund. The success of ongoing investments to turn around revenue declines in the Midstock segment amidst aggressive competition is uncertain, and Getty Images will need a couple of years to bring debt-to-EBITDA to the mid to high 6x range (including Moody's standard adjustments), matching the leverage of the 2012 buyout.

The majority of consolidated revenue is supported by Getty Images' leading positions in premium stills and editorial segments and consists primarily of exclusive imagery. In contrast, we believe operating risks in the Midstock segment are significant given aggressive competition, including pricing pressure, from imagery providers such as Shutterstock and Fotolia who are focused on the stock photo segment. Moody's believes it is important for Getty Images to succeed in profitably growing Midstock revenue to meaningfully increase EBITDA and improve leverage given the maturity of the premium stills segment and the small size of the higher growth video segment. As competition intensifies with advancing technology, Moody's view is that the company will be challenged to show progress in restoring growth in the next 12 months, but it has some time to execute its strategies given no significant maturities until 2017 when the undrawn revolver matures and the term loan due 2019 is covenant-lite. Ratings incorporate our expectations for continued economic recovery in the U.S. (North America accounted for 49% of revenue for the 12 months ended September 2014) and very modest economic growth in Europe (the EMEA regions accounted for 36% of revenue over the same period). Liquidity is expected to be adequate with $30 million of revolver availability (20% of the total commitment) and the potential to cut back on discretionary capital spending or investments.

The negative outlook incorporates Moody's expectation that total revenue growth will be muted by continued declines in the Midstock segment and uncertainties related to timing of a rebound. We expect growth in EBITDA and free cash flow will also be limited by marketing spend or technology investments resulting in only modest improvements in leverage. Management confirms that excess cash will be used primarily to reduce debt balances with acquisitions being put on hold; however, growth in free cash flow as a percent of debt will remain in the low single digit percentage range due largely to an estimated $63 million in up front tax payments related to a tax restructuring aimed at realizing $15 million to $20 million in annual tax savings. Most of these up front tax payments will be funded in 2015 and will be partially offset by a one-time tax refund of $20 million (expected to be received in the first half of 2015). Despite these sizable net cash outflows, we expect liquidity will be adequate with low single digit percentage free cash flow-to-debt and assume only 20% of the $150 million revolver commitment will be available to avoid triggering the 1st lien leverage covenants under the revolver facility. Moody's believes the company will manage its liquidity position and reduce discretionary investments and capital spending as needed to ensure debt service is met.

Ratings could be downgraded if overall operating performance tracks below Moody's current base case forecast due to a weakening U.S. or European economy or due to the inability to stabilize revenue in the Midstock segment. Ratings could also be downgraded if we expect the company will not be able to make progress in reducing leverage or if liquidity deteriorates from current levels and we expect free cash flow-to-debt will be sustained below 1%. The outlook could be changed to stable if the company is able to achieve consistent growth in Midstock revenue, restore free cash flow generation with no additional tax restructuring payments or other significant unexpected uses of cash, and the company makes progress in reducing leverage below current levels.

The principal methodology used in these ratings was Global Broadcast and Advertising Related Industries Methodology published in May 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Seattle, WA, Getty Images, Inc. is a leading creator and distributor of still imagery, video and multimedia products, as well as a recognized provider of other forms of premium digital content, including music. The company was founded in 1995 and provides stock images, music, video and other digital content through gettyimages.com and iStockphoto.com (re-launched in September 2014). In October 2012, The Carlyle Group completed the acquisition of a controlling indirect interest in Getty Images in a transaction valued at approximately $3.3 billion. The Carlyle Group owns approximately 51% of the company with a trust representing certain Getty family members owning approximately 49%. Revenue totaled $879 million for the 12 months ended September 30, 2014.

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.

Carl Salas
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

John C Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's changes the outlook of Getty Images to Negative from Stable; affirms B3 CFR
No Related Data.
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