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I AGREE
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,
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in each case where the transaction structure and terms have not changed
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For any affected securities or rated entities receiving direct credit
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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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