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Global Credit Research - 12 Aug 2010
London, 12 August 2010 -- Moody's Investors Service has today upgraded to Ba3 from B1 ITV
Plc's corporate family rating (CFR), probability-of-default
rating (PDR) and senior unsecured ratings. The ratings outlook
on all ratings is stable.
"Moody's decision to upgrade ITV's ratings was prompted
by: (i) the cyclical recovery observed in the UK television advertising
market since the beginning of 2010, which led to ITV's considerably
strong operating performance in H1 2010; and (ii) the likely resulting
meaningful improvement in ITV's net debt/EBITDAR ratio (as calculated
by Moody's) for fiscal year 2010, together with continued
good free cash flow generation," says Gunjan Dixit,
Moody's lead analyst for ITV.
Moody's notes that ITV performed particularly strongly in H1 2010,
aided not only by the recovery in the UK television advertising market
but also by the 2010 FIFA World Cup. While ITV expects around 15%
growth in its net advertising revenues (NAR) in Q3 2010, the company
will face tougher comparables in Q4 2010, and the visibility for
2011 and beyond is currently limited. Therefore, the stable
outlook reflects Moody's expectation that, going forward,
ITV will continue to cautiously manage its discretionary cash outflows
(for add-on acquisitions and dividends, for example),
while making progress towards executing its recently announced five-year
business transformation plan. In this regard, the rating
agency notes ITV's cautious approach towards dividends in 2010,
given the uncertain economic outlook, and the company's continued
focus on cost control and cash conservation.
ITV's ratings and outlook also factor in: (i) the high operating
leverage of the company; (ii) the significant execution challenges
associated with the successful implementation of ITV's transformation
plan over the medium term; and (iii) the considerable exposure of
ITV's revenues to cyclical TV advertising spending, which
is itself exposed to the potential growth of advertising on alternative
media, such as the internet.
After registering a decline of more than 11% in 2009, NAR
for the whole of the UK (as estimated by ITV) improved by 15% in
H1 2010, with the ITV family having outperformed the market with
an 18% increase in revenues. The company's reported
EBITA also improved significantly in H1 2010, to GBP165 million
from GBP46 million in H1 2009. ITV's net debt/EBITDAR (as
calculated by Moody's), which deteriorated to 4.7x
at the end of 2009, is likely to register a significant improvement,
helped by company's strong operating results in H1 2010.
In this regard, Moody's notes that ITV's IAS 19 pension
deficit (EUR449 million as of 30 June 2010) remains significant,
and continues to be a material adjustment to the company's debt
metrics. While ITV's operating results in H1 2010 significantly
improved, Moody's notes that ITV reported that: (i)
ITV1's viewing share declined by a further 5% in H1 2010;
(ii) ITV.com video views fell by 14%; and (iii) the
revenues from the ITV Studios segment dropped by 14%, signalling
the structural issues facing ITV.
ITV's recently announced five-year transformation plan aims
to re-shape the company into a "lean" organisation
whose objective is to create content that can be executed globally and
across multiple platforms, with the company remaining focused on
maximising its audience and revenue from its existing free-to-air
broadcast business. Moody's notes that, over time,
ITV aspires to generate approximately 50% of its revenues from
non-television advertising sources. As part of its transformation
plan, ITV will allocate an investment fund of GBP75 million over
the next three years for online, content and digital channels.
The company has also committed to restricting its ITV1 programme budget
to below GBP800 million in 2011 and 2012.
While Moody's positively notes the progress that ITV has made over
the past three months towards the development and delivery of its strategic
plan (including making changes to senior management, creating new
operational boards, delivering expected cost efficiencies,
announcing the launch of ITV1+1 in Q1 2011, as well as recently
announcing its agreement to launch ITV2 HD, ITV3 HD and ITV4 HD
as pay channels on Sky), the rating agency believes that significant
execution risks remain. Furthermore, the timing and pace
of the delivery of the objectives outlined in the transformation plan
remain relatively unclear, as ITV's new senior management
team has, in Moody's view, adopted a relatively cautious
approach and has not currently publicly committed itself to any quantifiable
key performance indicators for the five-year period.
Positive ratings pressure is likely: (i) with a more stable trend
in NAR development in 2011 and beyond (ii) the company exhibiting that
it can maintain a ratio of net debt/EBITDAR (as calculated by Moody's)
below 4x on a sustained basis, together with meaningful free cash
flow generation (as defined by Moody's -- post capex and dividends);
as well as (iii) ongoing evidence of the successful implementation of
the newly introduced medium-term strategic plan.
On the contrary, renewed negative ratings pressure could develop
with a material deterioration in the UK net advertising spending and/
or any material acquisition(s), which alone or in combination with
such deterioration lead to a significant worsening in company's
net debt/ EBITDAR (as calculated by Moody's) materially above 4.5x
on a sustained basis.
Moody's considers ITV's liquidity profile to be adequate for
its current needs. As of 30 June 2010, the company had cash
and cash equivalents of GBP538 million (excluding certain restricted and
unavailable cash amounts totalling GBP148 million). In addition,
as of the same date, the company had access to a GBP75 million receivables
facility (available to May 2013), which currently remains fully
undrawn and is covenant-free. Since the beginning of 2010,
ITV has bought back GBP33 million worth of the nominal amount of the 2011
bonds and GBP42 million worth of the 2015 bonds. This leaves the
company with 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 months, including bolt-on acquisitions.
The last rating action on ITV was implemented on 7 August 2009,
when Moody's downgraded the company's senior unsecured ratings
and its CFR to B1 (from Ba3).
The principal methodology used in rating ITV was Moody's "Global
Broadcast Industry Rating Methodology", published in June
2008 and available at www.moodys.com in the Ratings Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Ratings Methodologies sub-directory
on Moody's website.
Headquartered in London, United Kingdom, ITV plc is the leading
commercial free-to-air broadcaster and producer of television
programming, and generated turnover of GBP1.88 billion in
the year ended 31 December 2009.
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
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Corporate Finance Group
Moody's Investors Service Ltd.
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Moody's Investors Service Ltd.
Moody's upgrades ITV to Ba3; outlook stable
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