OREANDA-NEWS. Fitch has affirmed Radio e Televisao Bandeirantes Ltda.'s (RTB) long-term foreign currency and local currency Issuer Default Ratings (IDR) at 'BB-'. Fitch has also affirmed the company's National long-term Rating at 'A(bra)'. The Rating Outlook is Stable.

RTB is a part of Grupo Bandeirantes de Comunicacao (BAND), a diversified media group in Brazil, and is one of the group's major free-to-air (FTA) TV and radio broadcasters. The ratings are based on the combined credit profile of BAND given the centralized group cash management, and a strong operational linkage among the group companies under the common executives and the control by the major shareholder.

The ratings reflect BAND's diversified media business with a nationwide presence in Brazil, stable operational outlook, its recent successful implementation of growth and cost saving initiatives, all of which have led to its material profitability improvement during 2014 and moderately low leverage for the rating category.

Negatively, ratings are tempered by BAND's weak market position in its main TV business and a small operational scale compared to regional peers, an intense competitive landscape, weak free cash flow (FCF) generation and liquidity, as well as high interest costs. The company's corporate governance is also considered below the average for the rating category.

KEY RATING DRIVERS

Diversified Media Portfolio:

BAND is one of the largest and most diversified media groups with a national presence in Brazil. The group's main business is free-to-air (FTA) television and radio broadcasting which combined represented above 80% of the group revenues in 2014. BAND also produces free newspapers, pay-TV programming, media solution in public transportation in its 'out-of-home (OOH)' segment, as well as internet portal website.

BAND boasts strong operational integration across its various media platforms backed by the sharing of production infrastructure and talents, as well as the distribution of contents under the common management. This helps the group maintain the quality of contents across the segments with an efficient cost structure.

Strong Growth in 2014:

BAND's EBITDA improved significantly during 2014 reaching BRL319 million from BRL155 million a year ago, with the EBITDA margin improving to 22% from 13% during the same period. This is due to the company's successful cost saving measures, mainly including integration of contents production across its various media platforms and streamlining of labor cost structure, as well as solid growth in its entertainment contents. Given the improved cost structure and favorable operational outlook, Fitch expects the company's stable performance to continue in the short to medium term.

Positive Operational Environment:

Advertisement industry in Brazil is one of the largest globally and continues to grow strongly, far outpacing the growth of the domestic economy. The industry is estimated to have reached BRL33.5 billion in 2014, which compares to BRL22 billion in 2009. TV accounts for the largest portion, about 75% including pay-TV, of total advertising revenues, reflecting TV viewing as one of the major leisure activities in the country. Slowing Brazil economy could be potentially negative over the medium term; however, any signs of material subdued growth of the advertising industry has yet to be seen.

In addition, BAND's revenue diversification into other segments, mainly the OOH segment, is positive. The OOH segment revenues grew by 93% in 2014 and the strong trend is likely to continue over the medium term given still low penetrations of this service in Brazil. Fitch forecasts this segment's revenue proportion will rise to over 15% by 2016 from only about 6% in 2013.

Weak TV Market Position:

BAND is the fourth largest TV operator in a highly competitive industry in Brazil where the market is dominated by Globo with an about 40% market share. The company accounted for a TV audience market share of about 6% in 2013, which was a modest improvement from 4% in 2007. Fitch expects the competitive landscape will remain intense which could limit any significant market share improvement of the company. BAND's main contents are news, sports, and entertainment in which it has a strong in-house contents production. For its radio operation, the company is the largest broadcaster with over 20% market share in Sao Paulo.

Moderately Low Leverage:

BAND's consolidated leverage ratio is moderately low for the rating category, backed by significant EBITDA improvement during 2014. The company's net leverage was 2.4x at end-2014, which compares favorably to 4.1x at end-2013. FCF generation is likely to remain weak in the short term due to high interest costs and capex, as well as working capital needs. Positively, Fitch expects this to reverse over the medium term as the company's capex gradually declines close to BRL70 million from BRL117 million in 2014 as investments into the fast-growing OOH segment falls. Fitch forecasts the company's net leverage to stay stable at around 2.5x in 2015 and 2016.

Weak Liquidity:

BAND's liquidity profile is weak as almost 65% of its total debt at end-2014, about BRL515 million, had maturities within 2015 while the company's cash balance was just BRL79 billion. Although this is a key credit concern, Fitch expects the company to be able to refinance its short-term debt obligation. The company held BRL220 million of credit facility during the same period, which helps manage its liquidity condition.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for RTB include:

-- Mid single digits revenue growth over the medium term;
-- EBITDA margin to remain stable at around 20% in 2015 and 2016;
-- FCF generation to reverse to positive from 2016 due to a tempered capex budget of around BRL70 billion;
-- Net leverage to remain solid at around 2.5x over the medium term;
-- Successful refinancing of the short-term debt obligations leading to extended debt maturities profile.

RATING SENSITIVITIES

Negative rating action can be considered if BAND's consolidated net leverage substantially increases due to continued negative FCF generation amid high competitive pressures. Also, the ratings reflect Fitch's expectation that the company would successfully refinance and extend its short-term debt maturities. Failure to improve the liquidity profile can lead to a negative rating action.

Conversely, Positive rating action can be considered in case of BAND's continued strong growth in cash flow generation and market shares. Positive FCF generation enabling the company's net leverage falling to below 2.0x with a sound liquidity profile on a sustained basis could be positive for the ratings.

LIQUIDITY AND DEBT STRUCTURE

BAND's liquidity profile is weak as the company held about BRL515 million of short-term debts against its cash balance of BRL79 billion at the end of 2014. The company held BRL220 million of credit facility during the same period.

The company's debt is mostly comprised of bank loans, accounting for about 80% of the total debt at end-2014. About 65% of its total debt were secured loans with collaterals on the company's trade receivables, real estate properties, bank deposits, etc.