Fitch ratings issued its rating on the $500 million in senior notes priced Tuesday by CBS:
“Fitch Ratings has assigned a ‘BBB’ rating to CBS Corporations’ (CBS) $500 million ten-year senior unsecured note offering. The proceeds are expected to be used to tender for a portion of CBS’ senior notes and debentures due in 2011 and 2012. Fitch currently has a ‘BBB’ Issuer Default Rating (IDR) for CBS. The Rating Outlook is Stable.
CBS will issue the senior notes under the amended and restated indenture dated Nov. 3, 2008. The notes will rank pari passu with all other unsecured and unsubordinated indebtedness of CBS. Like all of the senior unsecured debt issued by CBS, the notes will be fully and unconditionally guaranteed by CBS Operations Inc., a wholly-owned subsidiary of CBS that directly or indirectly owns Showtime Networks, Simon & Schuster, CBS Television Studios, 11 of the company’s 30 full power broadcast television stations, and the partnership interest in The CW Network.
Terms are similar to that of previously issued notes, including i) a limitation on liens of up to 15% of total consolidated assets (excluding standard carve-outs); ii) the ability to sell or convey assets that generate up to 80% of consolidated revenues; and iii) an obligation of CBS to repurchase the notes at 101% upon change of control (including a transfer of more than 50% of the company’s voting stock) and non-investment grade ratings. Similar to existing bonds, there are no financial covenants. However, unlike the senior notes issued in May 2009, there is no coupon step-up provision in this issuance.
CBS also recently disclosed two additional actions that will reduce debt. First, CBS has called approximately $415 million of 7.70% senior notes, for settlement on April 30 (final maturity July 2010). CBS will redeem these notes with cash. Secondly, on March 23, CBS repaid with cash the $400 million outstanding under its accounts receivable (AR) securitization facility and terminated the program. In total, Fitch estimates that these two transactions will reduce debt by approximately $815 million.
In Fitch’s view, the transactions are positive from a credit and liquidity perspective. Although the new issuance and tender as contemplated do not change CBS’ debt balance or leverage metrics, they will result in $500 million of near-term maturities being extended ten years. Additionally, the call for the July maturity and repayment of the AR facility will, as discussed, reduce debt by $815 million, and further reduce CBS’ heavy near- and intermediate term maturity schedule, which has long been a concern to Fitch. These transactions reduce but do not remove the maturity overhang, and provide the company with incremental financial flexibility. Nonetheless, pro forma for the transactions, CBS still faces a material $1.8 billion of maturities through 2014.
Pro forma for the aforementioned transactions, Fitch estimates leverage (total debt/LTM EBITDA) of 3.4x at Dec. 31, 2009. This compares to reported leverage of 3.8x, including $400 million outstanding under the AR securitization facility (which was off-balance sheet at the reporting date but would have come on balance sheet as of March 31, 2010 due to recent accounting rule changes). Despite this deleveraging, CBS remains weakly positioned in its ratings category.
Fitch views CBS’ current liquidity as adequate, and more than enough to accommodate the aforementioned transactions. At Dec. 31, 2009, CBS had $716 million of cash on hand, and Fitch expects at least $300 million of free cash flow in the first quarter of 2010. As a result, Fitch estimates that, after the $815 million of debt repayment, the company will have over $200 million of pro forma cash on hand at 1Q09. CBS also has $1.84 billion of availability under its $2.0 billion revolving credit facility (net of $163 million letters of credit), which matures in December 2012.
As of Dec. 31, 2009, CBS had $7.4 billion of debt, which consisted primarily of:
— $415 million senior unsecured notes due July 2010 (will be redeemed on April 30);
— $950 million senior unsecured notes due 2011;
— $850 million senior unsecured notes and debentures due 2012;
— $500 million senior unsecured notes due 2014;
— $4.2 billion senior unsecured notes and debentures maturing 2016-2056; and
— $400 million outstanding under CBS’ A/R securitization facility, which was repaid on March 23, 2010.
CBS’ ratings continue to be supported by a strong presence in the top 25 U.S. markets, leading positions in first-run syndication, a robust library and pipeline of off-network syndicated programming and an increasing portion of carriage revenues. Concerns include an above average exposure to cyclical advertising revenue, weak pro-forma credit protection metrics for the rating category, technological threats within radio and television broadcasting, and a still material maturity schedule over the next four years.
Fitch currently rates CBS as follows:
CBS Corporation (CBS)
— Long-term IDR at ‘BBB’;
— Senior unsecured at ‘BBB’;
— Short-term IDR at ‘F2’.
— Long-term IDR at ‘BBB’;
— Senior unsecured at ‘BBB’.
The Rating Outlook is Stable.”