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Rating Action:

Moody's upgrades ITV to Ba2; stable outlook

13 Apr 2011

London, 13 April 2011 -- Moody's Investors Service has today upgraded ITV Plc's corporate family rating (CFR), probability-of-default rating (PDR) and senior unsecured ratings to Ba2 (from Ba3). The outlook on all ratings is stable.

RATINGS RATIONALE

"Moody's decision to upgrade the CFR to Ba2 with a stable outlook is based on: (i) ITV's strong operating performance in 2010; (ii) the significant improvement in its credit metrics; and (iii) the company's solid liquidity profile," says Gunjan Dixit, Moody's lead analyst for ITV.

In 2010, ITV outperformed the UK television advertising market by 1% and its net advertising revenues ('NAR') experienced growth of 16% over 2009. The strong recovery in the advertising market as well as ITV's continued focus on cost control helped the company to double its EBITA (before exceptional items) during the year to GBP408 million. Supported by its significant cash balance at the end of December 2010, the company was able to significantly reduce its net debt, to GBP188 million at the end of 2010 (from GBP612 million as of 31 December 2009). ITV also reduced its IAS 19 pension deficit, to GBP313 million (from GBP436 million in December 2009). This led to an improvement in the company's ratio for net adjusted debt/ EBITDAR (as calculated by Moody's) to 1.4x as of 31 December 2010 from 4.7x at the end of 2009. The Gross Debt/ EBITDA (as calculated by Moody's) also improved to 3.5x at the end of 2010.

"While ITV's strong credit metrics alone may merit a higher credit rating, Moody's Ba2 CFR cautiously takes into account: (i) ITV's considerable exposure to the cyclical nature of TV advertising spending; (ii) the company's high operating leverage; (iii) the significant execution risks associated with the implementation of its five-year transformational plan; and (iv) its inefficient balance sheet at the end of 2010," adds Ms Dixit.

ITV expects its NAR to have increased by 12% in Q1 2011 and to grow by 8% to 12% in April 2011. However, going forward, comparatives are likely to become increasingly tough and Moody's notes ITV's cautious outlook for the rest of 2011. The rating agency also notes that ITV will declare dividends with its H1 2011 results. Given the highly cyclical nature of ITV's business and the company's medium-term strategic objectives, Moody's would expect the company to adopt a relatively conservative stance towards dividend payments. In addition, the rating agency would expect ITV to dedicate a meaningful portion of its cash balance towards (i) future investments (including add-on acquisitions), (ii) debt reduction and (iii) retaining some flexibility on its balance sheet to cope with any downward swing in TV advertising revenues as well as for its working capital requirements.

As part of its transformation plan, ITV will invest GBP25 million in online, content and digital channels in 2011, and the company expects ITV1's network programme expenditure to be around GBP800 million for the year. ITV further expects its capital expenditure (capex) to increase to GBP80 million in 2011 while its working capital movement could turn negative given that the company reduced its programme rights and other inventory to more "normalized" levels during 2009/10. This will result in the relative weakening of ITV's "profit to cash" conversion ratio in 2011, which was abnormally strong in 2010, at 127%.

Moody's positively notes the progress that ITV has made over the past months towards delivering its strategic plan. However, given that the implementation of the strategic plan is still in its initial phase, the rating agency believes that significant execution risks remain. Over time, ITV aspires to generate approximately 50% of its revenues from non-television advertising. While in the short term the company will remain focused on internally streamlining its operations, Moody's is of the opinion that the company may need to make add-on acquisitions over the medium term to increase its exposure to non-television advertising.

Moody's considers ITV's liquidity profile to be solid. As of 30 December 2010, the company had cash and cash equivalents of GBP860 million (including certain restricted and unavailable cash amounts totalling GBP136 million). In addition, as of the same date, the company had access to a GBP125 million receivables facility (available to September 2015), which currently remains fully undrawn and is covenant-free. In 2010, ITV bought back GBP54 million worth of the nominal amount of the 2011 bonds, GBP42 million worth of the 2015 bonds and repaid its GBP50 million loan due in May 2013. As a result, the company has no material debt maturities until 2013. In Moody's view, ITV's cash on hand and internally generated cash flows should be sufficient to cover the company's operational needs over the next 12-18 months, while giving it reasonable flexibility to make acquisitions. Given the inefficient state of ITV's balance sheet, Moody's would view as a credit positive the company using some of its financial flexibility in the short term to reduce its debt.

In Moody's view, upward rating pressure could result from: (i) a relatively stable trend in ITV's NAR development in 2011 and beyond; (ii) ITV maintaining its family share of viewing (at least) at the current level (~23.0% in 2010); (iii) ITV1's share of commercial impacts ('SOCI') broadly stabilizing around the current levels (~27% in 2010); (iv) ongoing evidence of the company's successful implementation of its medium-term strategic plan particularly towards gradually increasing its exposure to non-advertising revenues; and (v) the company's ratio of Gross Debt/ EBITDA (as calculated by Moody's) trending towards 3x on a sustained basis, together with positive free cash flow generation (as defined by Moody's -- post capex and dividends).

Moody's considers that renewed downward pressure on ITV's ratings could result from a (i) material deterioration in UK net advertising spending; (ii) ITV Family of channels (in particular ITV1) losing significant share of viewing and experiencing a material decline in its SOCI; (iii) and/or any material acquisition(s) in support of ITV's strategic objectives, which would lead to the company's Gross Debt/EBITDA (as calculated by Moody's) materially weakening to above 4.0x on a sustained basis.

The principal methodology used in rating ITV was Moody's "Global Broadcast Industry Rating Methodology", published in June 2008. Other methodologies used include Loss Given Default for Speculative Grade Issuers in the US, Canada, and EMEA, published June 2009.

Headquartered in London, United Kingdom, ITV plc is the leading commercial free-to-air broadcaster and producer of television programming. and The company generated a turnover of GBP2.06 billion in the fiscal year ended 31 December 2010.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

London
Gunjan Dixit
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Chetan Modi
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's upgrades ITV to Ba2; stable outlook
No Related Data.
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