Fitch Affirms Comcast's IDR at 'A-'; Outlook Stable
Approximately $49.3 billion of Comcast's consolidated debt, including $9.2 billion outstanding at NBCUniversal and $4 billion outstanding at NBCUniversal Enterprise as of June 30, 2015, is affected by Fitch's action.
KEY RATING DRIVERS
Consistent Capital Structure Policy: Comcast's capital structure and financial strategy remains balanced between investing in its businesses, reducing leverage to its target range of between 1.5x-2x, and returning excess capital to shareholders.
Significant Financial Flexibility: Fitch believes Comcast's strong operating profile and solid free cash flow (FCF) metrics afford the company a high degree of financial flexibility at the current rating category. Comcast generated approximately $7.8 billion of FCF during the LTM period ended June 30, 2015. Going forward Fitch anticipates the company will consistently generate consolidated FCF in excess of $7 billion.
Consistent Capital Allocation Strategy: Comcast's capital allocation policy is expected to remain relatively consistent and focused on returning capital to its shareholders while continuing to invest in the strategic needs of its business. Fitch expects that share repurchases will total approximately $6.75 billion during 2015, in line with management guidance.
Leading Market Positions: Fitch's ratings incorporate Comcast's strong competitive position as one of the largest video, high-speed data and phone providers to residential and business customers in the U.S. and the company's compelling subscriber clustering profile with operations in 39 states and the District of Columbia. In Fitch's view, NBCUniversal's size, scale, leading brand positions and diversity of operations and business risk, and position as one of the world's most prominent media and entertainment companies, lowers the business risk attributable to Comcast's credit profile. The company also creates new avenues for revenue and cash flow growth while limiting the impact on Comcast's balance sheet and credit profile.
Strength of Cable Networks: NBCUniversal's portfolio of leading cable networks as well as the growing importance of its theme parks business are key considerations supporting our ratings and are a strength of the company's credit profile. Fitch considers cable networks one of the strongest subsectors in the media and entertainment industry, which provides NBCUniversal with a revenue base largely consisting of stable, recurring and high-margin affiliate fee revenue generated from multichannel video programming distributors as well as being a significant source of NBCUniversal's FCF generation.
International Parks Investment: The affirmation incorporates the company's decision to purchase a 51% ownership stake in Universal Studios Japan (USJ) for approximately $1.5 billion. USJ's current ownership, consisting of Goldman Sachs, MBK Partners, Owl Creek Asset Management and current management, retain a 49% stake in the company. The investment marks a shift in Comcast's asset-light, licensing fee model for its international parks businesses. Furthermore, the investment presents an opportunity to geographically diversify its operating profile and leverage the growth and return on investment Universal Studios has captured in domestic markets.
Evolving Competitive Environment: Fitch believes that over-the-top (OTT) can become a persistent, long-term drag on the pay-television sector. The internet is becoming another platform to distribute video content. Fitch expects that OTT will have a broad impact on the sector affecting the size of pay-television and cable network subscriber bases, advertising and affiliate fee revenues, and programming costs. However, in Fitch's view, OTT and its impact on pay-television subscriber base will not materially affect Comcast's operating or credit profile over the current ratings horizon. Comcast has sufficient flexibility within the current ratings to withstand modest subscriber losses due to cord cutting. That said, however the largest offset to the threat of OTT to Comcast's cable business is that regardless of how a subscriber consumes video content - through the internet or with a traditional video service - the subscriber will still need to pay for network access (video or high-speed data service).
LEVERAGE AND FINANCIAL POLICY
Comcast's leverage metric through the LTM period ended June 30, 2015 was 2x, a modest improvement from 2.1x as of year-end 2014. Fitch believes Comcast's credit profile will be relatively consistent during 2015 and that leverage will approximate 2x as of year-end 2015 and remain within the higher end of the company's leverage target during the current ratings horizon. Total debt outstanding as of June 30, 2015 was approximately $49.3 billion, relatively unchanged compared with year-end 2014 and a modest 1.4% increase relative to year-end 2013.
Fitch's expectation that shareholder returns as a percentage of pre-dividend cash flow will increase during the ratings horizon is incorporated into the ratings. Comcast returned approximately $4.8 billion of capital to its shareholders through the year-to-date period ended June 30, 2015 in the form of dividends and share repurchases reflecting an 84.5% increase compared to the same period last year. Shareholder returns during 2015 represented approximately 93.1% of cash flow before dividends. Approximately $6.4 billion of share repurchase capacity remains under the current authorization as of June 30, 2015.
KEY ASSUMPTIONS
--Reflecting the overall maturity of Comcast's services, Fitch's base case assumes overall primary service unit (PSU) additions continue to slow, reflecting increasing penetration of the company's service offering portfolio. Importantly, Fitch believes that video service subscriber losses will continue to moderate over the forecast period. High-speed data subscriber growth remains in mid-single digits while telephony subscriber growth is in low single digits.
--Comcast's cable business will continue to report low- to mid-single-digit revenue growth during the forecast period as service ARPUs continue to grow in light of the favorable revenue mix shift of subscribers taking more advanced video services and higher speed (higher-priced) high-speed data service tiers as well as increased overall service penetration.
--Cable segment margins decline modestly during the forecast period reflecting ongoing programming cost increases. The increased costs are offset somewhat by Comcast's ability to shift its revenue mix to higher margin services such as high-speed data services and commercial services, as well as improving operational efficiencies.
--Cable segment capital intensity remains relatively consistent over the near term before moderating somewhat as the deployment of the X1 platform and related cloud DVR and wireless gateway spending winds down.
--Soft advertising market continues throughout the rating horizon forecast with base advertising revenues flat to down 1% excluding political and Olympic related spending.
--Mid-single-digit affiliate fee revenue growth within NBCU's cable network segment
--NBCU's broadcast segment benefits from strong retransmission and reverse compensation revenue growth.
--Theme park revenue growth is assumed at mid-single digits following the launch of the Harry Potter attraction during 2014 and 2015.
--Fitch's base case assumes no change in Comcast's financial policy or capital allocation strategy. In line with company guidance, we expect Comcast will repurchase $6.75 billion of its common stock during 2015.
RATING SENSITIVITIES
A positive rating action would likely coincide with Comcast committing to and achieving a financial policy consistent with an 'A' rating, including maintaining its leverage below 1.5x on a sustained basis. Comcast would need to demonstrate that its operating profile will not materially decline in the face of competition.
Negative rating actions would likely coincide with discretionary actions of Comcast's management including, but not limited to, adopting a more aggressive financial strategy or event-driven merger and acquisition activity that drive leverage beyond 2.5x in the absence of a credible deleveraging plan.
LIQUIDITY
Comcast's liquidity position and overall financial flexibility are strong based on Fitch's expectation that the company will continue to generate material amounts of FCF. Comcast generated approximately $7.8 billion of FCF during the LTM ended June 30, 2015. Going forward, Fitch anticipates that the company will consistently generate consolidated FCF in excess of $7 billion.
Fitch acknowledges that Comcast's share repurchase program represents a significant use of cash. However, Fitch believes the company would reduce the level of share repurchases should the operating environment materially change, in order to maximize financial flexibility.
The liquidity position is further supported by cash on hand (which totaled approximately $3.5 billion on a consolidated basis as of June 30, 2015) and $7.4 billion of collective available borrowing capacity (as of June 30, 2015) from Comcast's two revolving credit facilities. Commitments under Comcast's $6.25 billion revolver will expire during June 2017, while the commitments related to NBCUniversal Enterprise's $1.35 billion revolver expire during March 2018. The credit facilities provide a liquidity back-stop to the company's two commercial paper (CP) programs. Comcast maintains a $6.25 billion CP program (no outstanding amount as of June 30, 2015) while NBCUniversal Enterprise has established a $1.35 billion CP program under which approximately $705 million was outstanding as of June 30, 2015.
Comcast's debt maturity profile is well-laddered and within Fitch's FCF expectation. The company does not have any scheduled maturities during the remainder of 2015 excluding outstanding CP, followed by $2.5 billion, $2.6 billion and $4.1 billion during 2016, 2017 and 2018, respectively.
FULL LIST OF RATING ACTIONS
Fitch affirms the following rating with a Stable Outlook:
Comcast Corporation
--Long-term IDR at 'A-';
--Senior unsecured debt at 'A-';
--$6.25 billion revolving bank facility (co-borrower with Comcast Cable Communications LLC) at 'A-';
--Short-term IDR at 'F2';
--CP at 'F2'.
Comcast Holdings Corporation
--IDR at 'A-';
--Subordinated exchangeable notes at 'BBB'.
Comcast Cable Communications, LLC
--IDR at 'A-';
--Senior unsecured debt at 'A-';
--$6.25 billion revolving bank facility (co-borrower with Comcast) at 'A-'.
Comcast Cable Holdings, LLC
--IDR at 'A-';
--Senior unsecured debt at 'A-'.
Comcast MO Group, Inc.
--IDR at 'A-';
--Senior unsecured debt at 'A-'.
Comcast MO of Delaware, LLC
--IDR at 'A-'.
NBC Universal Media, LLC
--IDR at 'A-';
--Senior unsecured debt at 'A-'.
NBCUniversal Enterprise, Inc.
--IDR at 'A-';
--Senior unsecured debt at 'A-';
--$1.35 billion revolving bank facility at 'A-';
--Series A preferred stock at 'BBB';
--Short-term IDR at 'F2';
--CP at 'F2'.
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