Report: WGA strike has limited credit impact



Fitch Ratings said in a report the WGA strike has limited impact on the credit profile of the media and entertainment sector over the short-term. However, a prolonged strike could impact specific sub-segments of the industry. Broadcast TV Networks and TV studios will obviously be the most impacted by the strike. The daytime, primetime and late night programming of the networks rely heavily on the WGA for scripted programming. Many of the prime time shows typically have a pipeline of four to five shows that have already moved past the script writing stage. This pipeline combined with the typical repeat schedules should give the networks a lag time into the first few months of 2008 before new programming is necessary. Daytime and late night shows have less flexibility and will likely be affected over the short term. However, they generally represent a small portion of overall cashflows and therefore is not a major credit concern for Fitch. Other levers the networks could pull include ramping up reality shows and news programming shows. However, they note that it is not uncommon for some writers on news programs to also be unionized (CBS news writers that are members of the WGA have set a 11/15 deadline to potentially strike). In addition, some animated shows such as Fox’s The Simpsons can take nearly a year between script and actual production, thereby giving sufficient lead time to withstand the strike over the short term.

Fitch believes the TV studio side of these businesses should be able to continue much of their first-run syndication programming and continue to build-out their off-network syndication and DVD sales pipeline over the short-term. The stoppage on the primetime shows could have some short-term working capital impacts for the studios.

Fitch doesn’t believe cable TV networks will experience a material credit impact from the strike. For movie studios and distributors, there is typically a nine to 15-month lag time between the script-writing pre-production stage of a movie until it is finally released. Because of this lag time, Fitch does not expect any short-term impact for the movie studios and distributors as many of them already have first-half 2008 movies in the can and have already started production on second-half 2008 releases.

For broadcast affiliates, ad revenue is made from three main sources: their original news programming (estimated by Fitch at approximately 40%), local ads on network shows (30%) and local ads on syndicated shows (30%). All things being equal, ads sold during original news programming should not be impacted by the strike. While theoretically local time sold on network shows could be impacted longer term as the networks swap out their first-run scripted programming, Fitch says the local sales force should be able to generate additional lag time before local advertisers opt out of a television based ad strategy based on the strike. Fitch believes most of the ad revenue stream from syndicated shows should be unaffected.

A large portion of the broadcast affiliate field is owned by the conglomerates that own the networks. Among the many pure-play entities such Hearst-Argyle, Belo and Sinclair that own a substantial amount of local affiliates, Fitch believes these entities are more susceptible then their O&O counterparts to the strike. They generally have weaker capital structures and less diversified revenue streams, however should be able to withstand a short to intermediate stoppage within their existing ratings and outlooks/watches.