May 8 (SeeNews) - Ratings agency Moody's said on Tuesday it has upgraded Central European Media Enterprises (CME) Corporate Family Rating (CFR) to B1 from B2 as well as its Probability of Default Rating (PDR) to B1-PD from B2-PD.
The outlook on the ratings is positive, the ratings agency said in a statement.
In July, US investment firm KKR said that together with multi-play operator United Group, and the European Bank for Reconstruction and Development, it had agreed to acquire the Croatian and Slovenian media portfolio of CME. In a separate statement, CME said that the cash purchase price for the media portfolio was 230 million euro ($272.9 million), subject to customary working capital adjustments.
The company also operates in Bulgaria, Romania, the Czech Republic and Slovakia.
Details follow:
"The rating action follows the company's announcement in late April 2018 that in Q2 2018 it intends to apply USD100.9 million of proceeds from warrants recently exercised by Time Warner, along with the company's excess cash, to repay EUR110.0 million of the outstanding principal balance of the 2018 Euro Term Loan. Concurrent with this announcement, the company also announced an amendment to their existing term loan package which re-prices and extends the maturities of those loans, which reduces the borrowing costs, extends a majority of its debt maturities by at least two years and improves the company's liquidity.
"The ratings upgrade and the positive outlook principally reflects the continued decrease in leverage achieved by CME as well as its continued solid operating performance which we expect will persist over the next couple of years," says Alejandro Núñez, a Moody's Vice President -- Senior Analyst and lead analyst for CME. Including results from the CME's Croatian and Slovenian subsidiaries that are slated for divestiture, Moody's estimates that the company's Gross Debt/EBITDA (Moody's-adjusted) will decrease from 6.0x (as of 31 December 2017) to 5.1x as a result of the EUR110 million debt repayment and, furthermore, expects it to decline toward 4.4x by year-end 2018 (excluding any debt repayment sourced from a pending asset sale). This gross leverage level could improve further to 3.4x by year-end 2018 if CME's pending sale of its Croatian and Slovenian subsidiaries completes in mid-2018.
RATINGS RATIONALE
CME's EUR110 million debt repayment in Q2 2018, which follows two other voluntarily prepayments of the 2018 Euro Term Loan totaling EUR100 million and paid in August 2017 and February 2018, reinforces the company's deleveraging track record since early 2015 and tangibly demonstrates the company's stated commitment to a significantly lower leverage profile. As a consequence of the recent debt reduction and the April 2018 refinancing, CME's average cost of borrowing has declined by approximately 200 basis points, to a 4.0% weighted average borrowing cost from 6.0% at year-end 2017, resulting in annual interest cost savings of approximately USD25 million relative to 2017 levels.
Aside from the debt reduction resulting from the recent repayment of principal of the 2018 term loan, we anticipate that CME's improving free cash flow post transaction will allow it to deleverage further, toward 4.2x Moody's-adjusted gross leverage, by year-end 2018 and to comfortably reach our credit metric parameters for the current B1 rating. In addition, CME expects a pending divestiture of its Croatian and Slovenian subsidiaries will close in Q2 2018, subject to remaining regulatory approvals and other customary closing conditions. CME has stated it intends to apply the EUR230 million of expected proceeds from this divestiture to repay debt. Together with the April 2018 debt refinancing, that debt reduction would further decrease the company's borrowing costs by 80 basis points to approximately 3.2%. Pro forma for that debt reduction, CME's gross leverage would decline toward 3.4x and its Free Cash Flow / Gross Debt (both Moody-adjusted) would increase to around 12% by year-end 2018.
CME's B1 CFR reflects: (1) the company's significant progress in its operational and financial turnaround since early 2014 and the generation of positive free cash flow (FCF) in 2015-2017; (2) the fact that Time Warner Inc. (Time Warner, Baa2 stable) has maintained a majority economic ownership in CME since 2014, during which time it has extended tangible support to CME; (3) the positive trends in CME's advertising markets, which have enabled deleveraging, and our expectation that these markets will be stable over the coming 12-18 months; and, (4) the benefits of refinancing transactions in February 2016, March 2017 and April 2018 - which replaced CME's most expensive debt instruments, extended the company's debt maturities, and reduced its interest costs and foreign-exchange risk - and the potential for further deleveraging which CME could achieve using proceeds from the intended sale of its Croatian and Slovenian subsidiaries.
However, the B1 CFR also considers: (1) the company's historically volatile operating performance, driven by the cyclical nature of its advertising-dependent end markets; and (2) modest non-advertising revenues offset to an extent by a strategy to gradually increase carriage fees and subscription revenues.
Moody's considers CME's liquidity position to be good for its near-term operational and financing needs. As of 31 March 2018, the company had cash and cash equivalents of USD74 million and we anticipate the company will generate around USD100 million of free cash flow over the next 12 months. The company has full availability under its amended revolving credit facility of USD75 million whose maturity was extended to 2023 as part of the debt refinancing in April 2018. CME expects to fully repay by year-end 2018 the EUR41 million of outstanding principal remaining on its term loan maturing in May 2019. Following that repayment, the company's remaining debt principal of just over EUR700 million is scheduled to mature between November 2021 and April 2023.
RATIONALE FOR POSITIVE OUTLOOK
The positive outlook reflects an expectation of a further material decline in CME's financial debt and our expectation of continued operating momentum, which will bolster the company's key leverage and cash-flow-coverage metrics over the next 12 months toward the stronger end of the expected ranges for the current rating.
WHAT COULD CHANGE THE RATING UP / DOWN
The rating could move upward if CME's adjusted gross debt/EBITDA (Moody's-adjusted) declines toward 3.5x and its adjusted FCF/gross debt increases sustainably into the 7-10% range. Conversely, the rating could move downward if: (1) CME's earnings or liquidity deteriorate; (2) Free Cash Flow (FCF)/Gross Debt (Moody's-adjusted) is not sustainably maintained above 5%; or (3) it is unable to maintain leverage (gross debt/EBITDA as adjusted by Moody's) below 5.0x. Any indication of a weakening of material support from Time Warner could also be credit negative."