Moody's sees reverse comp threat for TV station owners


Retransmission consent fees have been an important new revenue stream for US television station owners – and that dependable flow of cash had been looked on favorably by the major credit rating agencies. But with the Big Four networks now demanding a share of that cash – and getting it in many recent affiliation renewals – one of the credit rating companies has raised a warning flag. Moody’s Investors Service says in a new report that the move to reverse comp will put pressure on the credit ratings of pure-play TV station operators.

This is obviously an area of concern – and constant discussion – in the television industry, so here is the entire commentary which Moody’s sent to RBR-TVBR:
“The major television networks’ increasing demand for compensation for the cost of creating content will put the earnings and credit quality of local broadcasters under more pressure over the next several years, says a new report by Moody’s Investors Service. The major networks include ABC, CBS, Fox and NBC.

‘As the four major US networks renew their multi-year contracts with broadcasters, the networks have increased their demands for ‘reverse compensation,’ which will pose a risk to broadcasters’ cash flow in the near term,’ says Carl Salas, a Moody’s Vice President and Senior Analyst.

‘The broadcasters’ EBITDA will be giving up a meaningful portion of a once-steady, high-margin contribution to their cash flow,’ Salas says. ‘The broadcasters can only offset this pressure if they can negotiate significant increases in retransmission fees from cable and satellite television providers.’

Retransmission fees, which broadcasters collect from pay-TV operators that air their content, are the TV broadcasters’ second-largest source of revenue, after advertising. But reverse-compensation fees that the networks have begun putting in their contracts with broadcasters will dilute the value of these retransmission fees, and will negate the near-term increases in retransmission fees that the broadcasters receive. Local broadcasters include Belo Corp., Gray Television, LIN Media, NexStar Broadcasting, and Sinclair Broadcast.

Broadcasters have already struggled with steep ad revenue declines since 2006-2007, the report says. Since the rules for reporting retransmission revenue are ambiguous and remain non-standardized across the industry, it is possible that the US TV broadcasting industry is facing a reverse-compensation burden greater than previously acknowledged, the report notes.

Broadcasters usually report retransmission fees as gross revenue, obscuring lower growth from ad revenues. Subtracting any reverse-compensation fees that the broadcasters pay the networks would render a net revenue figure, which would give a clearer indication of the toll reverse compensation takes on broadcasters, the report says.

Retransmission fees have been the fastest-growing source of revenue from 2006-2010 among the pure-play, speculative-grade US television broadcasters that Moody’s rates. Over those four years, retransmission revenues increased by a compounded 54% annually. The new report’s base case scenario forecasts continuing double-digit annual growth in fees resulting in a three-fold increase in retransmission revenues by 2017.

Pure-play broadcasters will generate higher revenue in 2012 from retransmission fees and political advertising, but by 2013, the stress of reverse compensation fees will be more obvious, as political advertising from the 2012 election season disappears. The networks’ increasing demand for reverse compensation fees will have a near term negative credit impact on broadcasters, the report says. In addition to negotiating higher retransmission fees, over the long term, broadcasters will need to strengthen their focus on growing advertising revenues and expanding digital strategies.”

The full report, “Networks Threaten Key Revenue Source For Pure-Play US TV Broadcasters,” is available from Moody’s Investors Service.