July 21, 2017 / 1:22 PM / a year ago

Fitch Assigns Banijay 'B+' Final Rating

(The following statement was released by the rating agency) LONDON, July 21 (Fitch) Fitch Ratings has assigned French media group Banijay Group SAS a final 'B+' Long-Term Issuer Default Rating (IDR) with a Stable Outlook. Fitch has also assigned a final rating of 'BB'/'RR2' to Banijay's issue of senior secured debt for refinancing. Banijay has an experienced management team that has maintained cost discipline during the expansion of non-scripted content. Non-scripted content is exposed to shifts in consumer sentiment, but Banijay has demonstrated an ability to adapt to these trends, including through customer diversification, with success in renewing shows for multiple seasons and in syndicating them to multiple countries. The rating is constrained by the company's high leverage, more limited size than peers, and the low monetisation of the company's back catalogue through Banijay Rights. If Banijay continues to attract talented producers that understand the local market and to expand its geographic reach, its ratings will benefit. KEY RATING DRIVERS Leading Independent TV Producer: Banijay is the fourth-largest producer of TV content and the largest independent producer globally. The success of scripted dramas such as "Versailles" and the rapid growth of over-the-top (OTT) platforms such as Netflix is leading to additional content demand across the industry. However, the cost of production and the length of development mean there is limited ability to produce new scripted content, whereas Banijay's focus on non-scripted content means it can be produced and delivered quickly. Greater Scale and Diversification: The recent acquisition of Zodiak has expanded the production of scripted shows. Including the pending Castaway transaction, scale has improved significantly, with revenue and EBITDA more than doubling. The mergers have also enhanced Banijay's library in scripted and non-scripted content and added greater geographical diversification. Banijay plans to increase scripted content to up to 20% of sales over the medium term. This has the potential to increase the need for working capital as a scripted show can take up to two years to produce and some offsets, such as tax credits, are only received at the end of production. Consistent FCF Generation despite Earn-Outs: Banijay's business is free cash flow (FCF)-positive; capex is low due to a asset-light operating model. Fitch expects funds from operations (FFO) margins to fall to around 7% through 2019 from above 9% in 2016, due to higher interest expense following the refinancing. We forecast consistently positive FCF, which will be used to finance over EUR100 million in earn-out payments in 2017 and 2018, but we expect cash balances to grow thereafter. Renewals Mitigate Business Cycle Risk: The risk of shows not being renewed and the potential for decreased demand among broadcast networks or OTTs due to the business cycle is mitigated by the success Banijay has had in renewing its existing shows and distributing them in additional geographies. The development of Banijay Rights after the Zodiak acquisition should improve the company's ability to monetise its back catalogue and further enhance revenue visibility. Above-Average Recoveries: Fitch uses a bespoke recovery approach for credits whose IDR is 'B+' or below. For Banijay, Fitch uses a going-concern approach where it assumes post-restructuring EBITDA is 25% below its 2017 forecast EBITDA, a 5.5x distressed multiple, and 10% of going-concern enterprise value (EV) is deducted for administrative claims. Fitch also assumes that the company's revolving credit facility (RCF), term loan and senior secured note are pari passu and that the RCF would be fully drawn upon default. Fitch therefore assigns a Recovery Rating of 'RR2' to the senior secured debt with recoveries between 70% and 90%. DERIVATION SUMMARY Banijay is the leading independent TV production studio and the fourth-largest globally. Its primary competitors are EndemolShine Group, ITV Studios, FremantleMedia and All3Media. It has a greater proportion of unscripted content than its peers, although the acquisition of Zodiak increases its exposure to scripted content. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth trending towards 6% in 2019; - EBITDA margin stable at 11.5%; - Increased demand for working capital due to the shift towards producing scripted content; - Over EUR100 million in payments for earn-outs and put options between 2017 and 2019. KEY RECOVERY RATING ASSUMPTIONS In addition to the recovery assumptions described above, Fitch considered the following factors in its recovery analysis. - The going-concern EBITDA estimate reflects Fitch's view of a sustainable, post-reorganisation EBITDA level upon which we base the valuation of the company. The going-concern EBITDA is 25% below forecast 2017 EBITDA to reflect the industry's move from top of the cycle conditions to mid-cycle conditions and intensifying competitive dynamics. This discount reflects the loss of several large shows and a decline in demand for scripted and non-scripted content. - An EV multiple of 5.5x is used to calculate a post-reorganisation valuation. The estimate considered the EV multiple of Fitch rated peers at 5.5x and current EV multiples of public companies similar to Banijay trading at the 8x-12x range, with the industry considered at the peak of the cycle. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -FFO-adjusted net leverage trending below 4x. -FFO fixed charge coverage above 3.5x. -Increased scale with sales above EUR1 billion, improved mix between non-scripted and scripted content and further development of the digital strategy. -Successful development of the Banijay Rights business and expansion into additional geographies. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -FFO-adjusted net leverage trending above 5x. -FFO fixed charge coverage below 3x. -Inability to turn around the businesses in Spain and Germany. -Failure to renew leading shows and delays in the development of the digital strategy. LIQUIDITY Satisfactory Liquidity: Banijay has comfortable liquidity, with EUR73 million in cash on balance sheet for 2016, consistently positive FCF, a EUR35 million RCF once the refinancing is completed and modest working-capital swings. Fitch believes that the transition to a greater proportion of scripted content will increase working capital requirements, but Banijay's liquidity is sufficient to meet those needs. Contact: Principal Analyst Roman Schorr Associate Director +49 69 7680 76 137 Supervisory Analyst Brendan Condon Director +44 20 3530 1599 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Damien Chew, CFA Senior Director +44 20 3530 1424 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. Summary of Financial Statement Adjustments: Operating leases were capitalised with a multiple of 8x, financial debt increased by for EUR18.4 million due to adjustments for factoring and the shareholder loan was not included in the quantum of debt. In addition to the source(s) of information identified in the Master Criteria, this action was informed by information from both the rating advisor and the management team including a management presentation and draft legal documentation. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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