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Global Credit Research - 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.
"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
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.
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
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Please see ratings tab on the issuer/entity page on Moodys.com
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The date on which some Credit Ratings were first released goes back to
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Moody's Investors Service Ltd.
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Moody's Investors Service Ltd.
Moody's upgrades ITV to Ba2; stable outlook
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