OREANDA-NEWS. Fitch Ratings has affirmed the following ratings for TV Azteca, S.A.B. de C.V. (TV Azteca):

--Foreign and Local Currency Issuer Default Ratings (IDR) at 'BB-';

--USD300 million senior unsecured notes due 2018 at 'BB-';
--USD500 million senior unsecured notes due 2020 at 'BB-'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

TV Azteca's ratings reflect its solid business position as the second largest TV broadcaster in Mexico, with 30% market share, and one of the two largest Spanish-language contents producers in the world. The ratings also reflect the company's increased but still moderate financial leverage for the rating level, as well as its large cash balance which supports its sound liquidity.

The ratings are tempered by the increasing competitive pressures on its main broadcasting operation in Mexico stemming from the industry maturity and a new entrant as a result of reform, and alternative advertisement platforms, all of which could continue to erode its cash flow generation and profitability, and increase leverage. TV Azteca's limited ability to raise debt due to the incurrence covenants for its senior unsecured notes also negatively affects its financial flexibility.

Slow Growth Ahead:

TV Azteca's advertising revenue growth in 2015 and 2016 will be slow, in the low single digits, as the Mexican broadcasting industry matures and other platforms, such as Internet, continue to attract advertisers. Although over-the-air broadcasting still remains the most effective advertising platform given the high penetration of TV in Mexican households, its revenue portion of the total advertising industry has gradually declined to 53% from over 60% in the past. The company's national advertising sales were MXN2.1 billion during the first quarter of 2015 (1Q'15), which was a slight decline from MXN2.2 billion a year ago. Positively, the growing revenue contribution from Azteca America, the company's Spanish broadcasting network in the U.S., should help offset the weak growth in Mexico to an extent. In 1Q'15, Azteca America's revenues grew by 6% compared to a year ago, representing 13% of the total sales during the period.

Negative Reform Impact:

The negative impact from the media sector reform will be visible from 2016 when Cadena Tres, the winner of the newly auctioned national broadcasting concession, starts operation and attempts to encroach on the existing broadcasters' market shares. Fitch believes that TV Azteca's market share loss will be modest over the medium term as the advertisers would prefer to buy advertisement slots from the company rather than the new entrant given its well-established quality content production. Nevertheless, in Fitch's view the increased competitive pressures that come with an additional competitor, along with the industry maturity, will undermine TV Azteca's growth potential and could lead to pressure on profitability going forward.

Margin Erosion:

Fitch forecasts the company's EBITDA margin will decline without any meaningful recovery in 2015 and 2016. The content production cost, including purchased exhibition rights, has been steadily increasing, accounting for almost 58% of total sales in 2014 from less than 50% in 2011. Also, the increasing revenue contribution from the lower margin Colombian telecom operation will dilute the margins. In 2014, the company's EBITDA margin, calculated by Fitch, fell to 26%, which compares unfavorably to 29% in 2013 and 33% in 2012.

Increased but Moderate Leverage:

TV Azteca's financial leverage is considered moderate for the rating although it has materially increased in recent years due to EBITDA contraction and high capex requirements. The company's gross and net leverage have increased to 4.6x and 2.9x, respectively, as of March 2015, which compare to 3.2x and 2x at end-2013, and 2.6x and 0.8x at end-2012. Given the aforementioned weak operating outlook and continued EBITDA loss from Colombia until 2016, Fitch does not expect any material improvement in the company's financial profile in the short- to medium-term as any significant free cash flow (FCF) generation is unlikely.

Positive Long-Term Diversification:

Over the long term, TV Azteca will benefit from cash flow diversification with its fiber optic network projects in Colombia and Peru with the support from their governments. The overseas expansion into fixed-line telecom operations can help mitigate the risk stemming from the increasing competitive pressure in its domestic broadcasting operations to a certain extent, although the contribution will remain small for the medium term. The company plans to increase the revenue portion from this segment to 10% in the long term.

Good Liquidity:

The company's liquidity profile is sound in light of its MXN5.4 billion cash balance, which fully covers its short-term debt of MXN1.1 billion as of March 31, 2015. Aside from the short-term debt due in 2015, the company faces no debt maturity until 2018, which provides comfort even as the company uses its cash balance to support the strategic investments in the short- to medium-term. Negatively, TV Azteca's financial flexibility to raise additional debt should remain constrained, due to the incurrence covenant for its senior unsecured notes.

Key Assumptions

--Low- to mid-single-digit annual revenue growth in 2015 and 2016;
--Market share gradually declines to below 30% in the long term due to the new entrant;
--EBITDA margin to trend down to below 25% over the medium term;
--Negative FCF to continue in 2015 mainly due to capex for HD conversion;
--Minor debt reduction in 2015 through repayment of USD71 million Euro commercial paper;
--Net leverage to be around 3x in 2015 and 2016, in line with the level at March 2015 in the absence of any sizable strategic investments.

Rating Sensitivities

A negative rating action could be considered in the case of a material market share loss and further margin erosion, as well as weaker cash generation due to high strategic investments and content purchases, and/or shareholder returns resulting in the company's net leverage increasing to above 4x on a sustained basis.

Factors that could lead to a positive rating action include a combination of the following: additional profitable business lines contributing to improvement in cash flow generation, consistently low leverage through the cycle, sustained increase in market share that would lead to higher cash generation allowing the company to weather its large working capital requirement.