Fitch Affirms News Corp.'s IDR at 'BBB'; Outlook Stable.CHICAGO -- Fitch Ratings Fitch Ratings An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. has affirmed the Issuer Default Rating (IDR IDR In currencies, this is the abbreviation for the Indonesian Rupiah. Notes: The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. ) and senior unsecured debt Unsecured debt Debt that does not identify specific assets that the debtholder is entitled to in case of default. ratings for News Corporation (News Corp.) and its wholly owned subsidiaries Wholly Owned Subsidiary A subsidiary whose parent company owns 100% of its common stock. Notes: In other words, the parent company owns the company outright and there are no minority owners. , News America Incorporated (NAI See Network Associates. ), News America Holdings, and News America Finance Trust II. Approximately $11.4 billion of debt and exchangeable securities are affected. The Rating Outlook is Stable. (See full ratings list below.) Overall, Fitch's ratings on News Corp. continue to recognize the company's size and scope as one of the largest global media and entertainment companies, with solid market positions in broadcast and cable television, filmed entertainment, newspapers, and satellite distribution. Fitch believes that at current levels, News Corp.'s credit protection measures, strong free cash flow, and solid liquidity make the credit profile strong for the rating category given its current business risks. However, Fitch believes that existing and expected financial policies over the longer term will remain more consistent with the 'BBB' rating level. Rating concerns center on the secular challenges facing the newspaper, TV broadcasting, and Direct Broadcast Satellite (DBS (Direct Broadcast Satellite) A one-way TV broadcast service from a communications satellite to a small round or oval dish antenna no larger than 20" in diameter. ) businesses, event risk associated with the large ownership stake held by Liberty Media Corp., the risks associated with the company's launch of My Television Network (MTN MTN A short-form for Medium Term Note. MTN Medium term notes issued by corporations, much like shorter-term commercial paper. MTN See medium-term note (MTN). ), corporate governance Corporate Governance The relationship between all the stakeholders in a company. This includes the shareholders, directors, and management of a company, as defined by the corporate charter, bylaws, formal policy, and rule of law. , and risks associated with potential changes in financial and operating philosophies which could result in leadership succession over the intermediate term. Also, despite being geographically diversified, News Corp.'s dependence on cyclical advertising revenues (over 50% of total revenue) remains a concern to Fitch. Other credit concerns center on the inherently variable nature of the company's filmed entertainment and TV programming production business segments. News Corp.'s diversification extends through its product offerings and geographically as well, where it is exposed to the U.S. (slightly under 60%), U.K. (approximately 30%), and Australia and other advertising markets (approximately 10%), somewhat limiting its exposure to regional economic slowdowns. While over 50% of revenue is derived from secularly challenged industries, the company has benefited from sustained audience share growth in recent years at its TV and cable networks. Improved ratings (since the prior carriage deals were negotiated) at the cable networks should translate into pricing power Pricing Power An economic term referring to the effect that a change in a firm's product price has on the quantity demanded of that product. Pricing power ties in with the "Price Elasticity of Demand. with cable MSOs as some carriage contracts come up for renewal in late 2006 and 2007. Additionally, the company has benefited from the performance of its filmed entertainment segment, which has bolstered its market share in recent years from below 10% in 2003 to well over 15% in 2005 and year-to-date 2006, and has expanded operating EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) A metric used to show a company's profitability, but not its cash flow. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become margins 16% to 19% over that time period. Fitch also recognizes the recent softening of recently strong trends in cable industry advertising sales growth and the maturing DVD DVD: see digital versatile disc. DVD in full digital video disc or digital versatile disc Type of optical disc. The DVD represents the second generation of compact-disc (CD) technology. market. The company has established and begun to successfully execute on its Internet strategy, supported by strong registered user growth trends at Myspace.com, growing page views across the company's Internet portfolio, and recent success monetizing this Internet traffic Internet traffic is the flow of data around the Internet. It includes web traffic, which is the amount of that data that is related to the World Wide Web, along with the traffic from other major uses of the Internet, such as electronic mail and peer-to-peer networks. (as emphasized by the recently announced search revenue deal with Google that guarantees $900 million in high margin revenue over the next several years). However, Fitch recognizes there is still a degree of execution risk associated with the integration and further monetization of these assets. The company's credit ratings are further supported by the improving credit trends and the growing asset values of the company's sizeable equity investments (estimated value of over $15 billion), including its worldwide direct broadcast satellite position. News Corp.'s operating EBITDA margin is healthy at approximately 19%, while it is currently converting approximately 38% of operating EBITDA to free cash flow (FCF FCF Free Cash Flow FCF Free Congress Foundation (conservative activist group) FCF Feline Conservation Federation FCF Frontiersmen Camping Fellowship FCF Functional Check Flight FCF Fluids and Combustion Facility )(after accounting for dividends). The rating incorporates the event risks associated with a potential deal with Liberty to repurchase a part or all of Liberty's stake in News Corp. The entire stake held by Liberty is valued around $10 billion; however, a deal for a portion of the holdings (ie, $4 billion-$8 billion) in a mix of cash and assets is also a possibility. The ultimate rating conclusion would incorporate the size of the deal, the amount of the deal satisfied by News Corp. assets, and the amount of debt used. Fitch believes News Corp.'s financial flexibility should afford it the opportunity to handle a transaction with Liberty (even an all-cash deal at a meaningful premium) while holding its current rating category (other risks being equal). With over $5 billion in cash, $1.8 billion in FCF, $1.6 billion in available facility capacity, and a valuable, liquid investment portfolio (BSkyB, DirectTV, Gemstar), the company has significant flexibility and liquidity at current rating levels. News Corp. could add between $5 billion-$6 billion in debt and still maintain a pro forma As a matter of form or for the sake of form. Used to describe accounting, financial, and other statements or conclusions based upon assumed or anticipated facts. The phrase pro forma debt-to-operating EBITDA leverage ratio near the 3.5 times (x) range. While event risk related to the potential for other acquisitions and investments is always a concern, the Stable Outlook reflects Fitch's belief that any capital structure-altering investment and/or acquisition is likely to be financed with a combination of debt and equity. Fitch notes that the company financed significant portions of its investments in Direct TV and Fox Entertainment Group with equity. Gross debt-to-operating EBITDA decreased to 2.35x for the latest 12 months (LTM LTM abbr. long-term memory ) ended June 30, 2006 from 2.9x for fiscal 2004. This improvement was achieved primarily through strong growth in EBITDA during this time period. While total gross debt is up around $800 million since year-end 2004, net debt has decreased about $900 million despite the repurchase of over $2.2 billion worth of shares (net) during that time period. The company's ability to reduce its net debt position has been supported by its strong free cash flow, which totaled approximately $1.8 billion for the LTM ended June 30, 2006. The company has approximately $3.4 billion remaining on its share purchase authorization at June 30, 2006 and Fitch expects repurchases to remain a component of the company's prudent, balanced financial policy. Most of News Corp.'s debt has been issued by News America Inc. and News America Holdings (indirect 100% owned subsidiaries of News Corp.). Senior public debt instruments are intended to rank pari passu [Latin, By an equal progress; equably; ratably; without preference.] Used especially to describe creditors who, in marshalling assets, are entitled to receive out of the same fund without any precedence over each other. PARI PASSU. By the same gradation. with borrowings under the company's $1.75 billion credit facility due June 30, 2008. Facility financial covenants include maximum leverage of 4.5x and minimum interest coverage of 3.0x. While bondholders do not have protection in the form of financial covenants, there is cross acceleration and change of control language. The bonds also have a negative pledge Negative Pledge An agreement in which the borrower agrees not to pledge any of its assets as security and/or not to incur further indebtedness. which would go into effect if greater than 10% tangible assets (as defined) become secured. The company's capital structure also includes $1.6 billion, 0.75% BUCS issued in 2003 by News America Finance Trust II. Fitch assigns the BUCS units to Class A (100% debt, no equity) as defined under Fitch's recently updated and published hybrid securities guidelines. Per Fitch's guidelines, these units are not considered to be mandatorily convertible units and the underlying notes rank as senior notes. Fitch currently has the following ratings: News Corp. --Issuer Default Rating (IDR) 'BBB'. News America, Inc. --IDR 'BBB'; --Senior unsecured 'BBB'. News America Holdings --IDR 'BBB' --Senior unsecured 'BBB'. News America Finance Trust II --IDR 'BBB'; --BUCS senior exchangeable securities 'BBB'. Fitch's rating definitions and the terms of use Terms of Use are rules set up by the owner of an intellectual property or service to govern how they may be legally used. In many cases, terms of service are used as a contractual agreement between a company and users of a service they provide. of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures Policies and Procedures are a set of documents that describe an organization's policies for operation and the procedures necessary to fulfill the policies. They are often initiated because of some external requirement, such as environmental compliance or other governmental are also available from the 'Code of Conduct' section of this site. |
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