Fitch Affirms Nielsen's IDR at 'BB'; Revises Outlook to Stable
Fitch Ratings has affirmed its Issuer Default Ratings (IDR) for Nielsen Holdings, N.V. (Nielsen), and Nielsen Finance LLC and Nielsen Finance Co. (collectively, Nielsen Finance) at 'BB'. The Rating Outlook has been revised to Stable from Positive. The Outlook revision reflects Fitch's expectations that a credit profile consistent with a higher rating is not expected within the next 12 to 24 months. A full rating list is shown below.
On December 18, Nielsen announced a definitive agreement to acquire Arbitron Inc. The transaction is valued at approximately $1.3 billion and will be funded entirely with cash/new debt. Nielsen noted that it has obtained commitments to fund the transaction. The transaction is expected to close as soon as customary closing conditions are met and regulatory review is completed.
Fitch has and continues to expect Nielsen to deploy cash flows towards acquisitions. While Fitch was not anticipating an acquisition of this size, Nielsen has the financial flexibility to absorb it and maintain current ratings. Fitch calculates pro-forma unadjusted gross leverage at approximately 4.6x. Fitch believes Nielsen will be able to continue to reduce gross leverage levels as Fitch expects EBITDA will grow in the low- to mid-single digits over the next two years, coupled with mandatory debt amortization payments.
Nielsen has publicly stated its goal to reach investment grade (including on its most recent investor conference discussing the planned acquisition), but has not provided a leverage target or a rationale for maintaining investment-grade ratings. Fitch's concerns remain around the uncertainty of Nielsen's long-term financial policy (including a change in its investment-grade goal) and the risk to the balance sheet from a private equity exit. Nielsen noted in its public remarks that it would disclose additional information regarding financial policy, including returning capital to shareholders, at its earnings call in February.
At the current ratings, the above concerns are mitigated by Nielsen's free cash flow (FCF) profile. Fitch expects Nielsen to generate FCF in the $300 million-$400 million range per annum over the next several years (without adjusting for the Arbitron Inc. acquisition). This will provide Nielsen with the financial flexibility to satisfy mandatory debt amortization, make small acquisitions, and institute balanced shareholder-friendly programs.
Key Rating Drivers:
--Nielsen was much more resilient during the downturn than other media companies, given the contractual and diversified nature of its revenue stream and the benign competitive environment. The company exhibited revenue and EBITDA growth, as well as positive FCF, through the trough of the downturn.
--Nielsen's Watch and Buy businesses are well positioned in their respective markets. The ratings reflect the risk that competitive threats may emerge over time. Increased competition could result in revenue pressure (lost share), incremental costs (talent/sales/services), and some FCF pressure (investments in offerings). However, the complexity and significant investments associated with attempting to replicate Nielsen's offerings create meaningful barriers to entry.
Fitch believes Nielsen's liquidity is sufficient. At Sept. 30, 2012, liquidity was composed of $325 million of cash on hand and $558 million available under the $635 million senior secured revolver due in 2016. In the 12 months ended Sept. 30, 2012, Fitch calculates the company generated $367 million of FCF.
Adjusting for Nielsen's October market activity, but not for the Arbitron acquisition, total debt at Sept. 30, 2012 was approximately $6.3 billion, consisting primarily of $4.2 billion in secured term loans and revolver borrowings; $215 million of senior unsecured notes due 2014; $1.1 billion of senior unsecured notes due 2018; and $800 million of senior unsecured notes due 2020. The company has been active in managing its near-term maturities, and they are manageable over the next several years. Fitch calculates unadjusted gross leverage as of Sept. 30, 2012 at 4.0x (adjusting for October market activity).
In addition to the debt noted above, the company has $288 million of 6.25% mandatory convertible subordinated notes due 2013, which are afforded 100% equity credit under Fitch's hybrid criteria. These notes will automatically convert on Feb. 1, 2013 (less than three years) into common equity and have a set conversion rate (a max of 2.1739 and a min of 1.8116). The notching of the mandatory convertible instruments reflects Fitch's hybrid criteria, which typically notches such hybrid securities two notches down from the IDR.
The notching on Nielsen Finance's senior secured debt reflects the security provided to the lenders.
What Could Trigger a Rating Action
Positive: Absent a clear leverage target statement, continued improvement in operating trends with gross leverage less than 4x.
Negative: Additional debt-funded acquisitions that materially increased leverage, or shareholder-friendly policies that increased debt in the near term, and kept pro forma unadjusted gross leverage above 4.5x, would pressure the ratings.
Fitch has affirmed the following ratings:
--IDR at 'BB';
--Mandatory convertible subordinated notes at 'B+'.
--IDR at 'BB';
--Senior secured bank facility at 'BB+';
--Senior unsecured notes at 'BB'.
The Rating Outlook is Stable.
Additional information is available at www.fitchratings.com. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' Aug. 8, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
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