TV Broadcaster Central European Media Enterprises #B+# Rating Outlook Positive

Stocks and Financial Services Press Releases Tuesday February 27, 2018 17:51
LONDON--27 Feb--S&P Global Ratings

LONDON (S&P Global Ratings) Feb. 27, 2018--S&P Global Ratings today removed its 'B+' long-term issuer credit rating on Bermuda-registered TV broadcaster Central European Media Enterprises Ltd. (CME) from CreditWatch with developing implications, where it had been placed on July 12, 2017.

At the same time, we affirmed our 'B+' rating and assigned a positive outlook.
We resolved the CreditWatch placement because we no longer see a significant likelihood that we could lower the rating over the coming months.

We expect the group will achieve lower leverage and lower interest costs in 2018; it delivered stronger operating performance in 2017 and used free cash flow to repay a portion of its debt. In our view, the group's capital structure has become more sustainable and its ability to service debt on a stand-alone basis has improved. We also think that if in 2018 CME performs in line with our base-case forecast, and the group's management remains committed to tight control over operating costs and reducing debt further, we could raise the rating, unless our assessment of CME's strategic importance to its main shareholder, Time Warner Inc., changes. We project that the group could reduce its leverage more quickly if it completes the sale of its assets in Croatia and Slovenia and uses all the proceeds to pay down debt.

The sale of CME's broadcast operations in Croatia and Slovenia to United Group B.V., which it announced in July 2017, is nearing its conclusion. We estimate that these assets represented about 18% of CME's US$700 million consolidated revenues and about 13% of EBITDA in 2017. We understand that the deal is currently awaiting regulatory approval, and will likely complete in the coming months. Until the deal is closed, we will calculate our credit metrics for CME to include the operations in Croatia and Slovenia, and will not include the EUR230 million (about US$285 million) of expected proceeds from the sale in our base-case forecast. After completing this sale, CME will likely benefit from focusing on the more profitable operations in its remaining markets, although it will lose some scale and geographic reach.

In 2017, CME performed better than we had forecasted. It achieved higher audience shares in most markets and like-for-like revenue growth in TV advertising and other revenues in all regions, which translated into S&P Global Ratings-adjusted EBITDA margins improving to 28% in 2017 from about 25% in 2016. TV advertising revenue growth was particularly strong in the Czech Republic and Romania, CME's two main markets, on the back of GDP growth and price increases. CME also significantly improved its profitability in Slovakia, where it successfully completed the shift from digital terrestrial transmission (DTT) to direct-to-home, cable, and IPTV (TV delivered via Internet protocol). We anticipate that the positive macroeconomic environment in Central and Eastern Europe in 2018-2019 will support further revenue growth for CME and will allow it to sustain its adjusted EBITDA margins.

CME's capital structure remains highly leveraged, but in our view it has become more sustainable over the past year. Stronger cash flow generation allowed CME to make two voluntary debt repayments in 2017 and early 2018. We estimate that at the end of 2017, the group's adjusted debt to EBITDA reduced to about 5.9x from 6.7x in 2016. In February 2018, CME repaid EUR50 million on its 2018 euro term loan, and we expect the overall borrowing cost might reduce to 5% in the first half of 2018, down from 6% at the end of December 2017. We estimate that in 2018 the group will continue to generate positive free operating cash flow, and will use it to repay debt.

In our base case (including CME's operations in Croatia and Slovenia), we assume:

Revenue growth in constant currencies of about 3%-4% in 2018-2019 on the back of steady economic and TV advertising revenue growth in key markets in Central and Eastern Europe, and continued increase in carriage fees revenues.

Adjusted EBITDA margins of about 26%-29% in 2018-2019, similar to 2017, reflecting control over costs that will be partly offset by increasing programming costs. This translates into our forecast adjusted EBITDA of about $205 million-$215 million over the same period.

Working capital outflows of about $15 million annually and a maximum intrayear outflow of up to $30 million.
No acquisitions or shareholder distributions.
Exercise of the warrants in 2018 at about $106 million.

Most of the generated free operating cash flow and all proceeds from the warrants to be used for optional repayment of the 2018 term loan (which had been extended to 2019) and of $35 million of accrued guarantee and commitment fees.Based on this, we arrive at the following credit measures:

Debt to EBITDA of about 4.4x-4.8x in 2018 and approaching 4x in 2019.
EBITDA interest cover improving to about 3.5x in 2018 and rising to 4.0x after that.
Free operating cash flow of about $75 million-$85 million in 2018-2019.

In our view, CME will remain an important investment for its main shareholder, U.S.-based diversified media and entertainment company Time Warner, as it is still Time Warner's largest international television network investment. Time Warner has previously stressed that, with the maturation of the U.S. domestic cable television market, it expects much of the growth in the cable network segment to come from its international operations. Time Warner also currently guarantees all of CME's term loans and provides its revolving credit facility (RCF).

At the same time, we consider that as CME's creditworthiness on a stand-alone basis has improved, it will be less reliant on Time Warner's support. We could revise our view of the importance of CME to Time Warner after AT&T completes its acquisition of Time Warner, which was announced in October 2016.

The positive outlook reflects our view that over the next 12 months CME will continue to reduce debt, while maintaining good operating performance with adjusted EBITDA margins close to 30%. We also assume continued support from its main shareholder, Time Warner.

We could raise the rating if we believe that CME's adjusted debt to EBITDA is set to reduce to less than 4x on a sustainable basis in 2018 and going forward. This could happen if CME completes the sale of its operations in Croatia and Slovenia and uses the proceeds to repay debt, and after we get more clarity on the group's financial strategy for 2019-2020 and onward. An upgrade would also hinge on CME generating free operating cash flow of over $50 million and our expectation that its main shareholder would offer financial support if needed.

We could revise the outlook to stable if CME's operating performance deteriorates due to an unexpected downturn in some of its TV advertising markets, or the group follows a more aggressive financial policy and allocates its free cash flow to acquisitions or shareholder payouts, so that adjusted debt to EBITDA remains at or above 4x in 2018-2019. We could also revise the outlook to stable if we consider that CME's strategic importance for Time Warner or AT&T has reduced, or the parent group no longer supports it financially.


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