Fitch Comments on Univision’s Outlook

Fitch Ratings stated today that the overall first-quarter results of Univision Communications, Inc. (Univision) were generally in-line with expectations. Despite weaker than expected results in radio and Internet, overall revenue growth of mid-single digits met expectations for the quarter. First-quarter margins were slightly compressed compared to last year due to higher programming and general costs.

While interest coverage for the quarter is below 1 times (x), the quarter typically only represents approximately 17%-18% of total annual EBITDA and Fitch fully expects the company to be above 1x interest coverage for the full year. Interest coverage could near 1.5x on a pro forma basis taking into account payment of a large portion of Univision’s $500 million second-lien loan due 2009 and a PIK (paid in kind) election on the company’s $1.5 billion subordinated notes. Relying on a PIK election to generate cushion for cash interest payments obviously signifies significant financial pressure; however, we still believe there are legitimate growth prospects for Univision to generate positive free cash flow over the intermediate term. Electing the PIK option over the next one to two years would give the company additional financial flexibility to allow it to meet its debt service obligations while focusing on growing the business (an election is automatic if revolver availability is below $300 million, which was the case as of April 7, 2008).

Fitch notes that second-quarter cash flows will likely remain weak as it will include the negative spread on the company’s recent $700 million revolver draw down and $250 million delay draw facility. In addition, management’s guidance of 1%-2% adjusted pacing for the second quarter is below our expectations, as the macro-economic environment continues to be a drag on overall advertising spend. Any revision of the Stable Outlook to Negative will be predicated more on visibility into third- and fourth-quarter performance (as opposed to second-quarter results), as we expect some traction in the second half of the year. The No.4 ranking in the 18-34 audience was largely the result of the writers strike affecting the other networks (Univision’s audience was generally flat); however, the uncertainty around the existing screen actors negotiations with the other networks could potentially provide some upside benefit to Univision in 2008.

Fitch rates Univision as follows, with a Stable Outlook:

–Issuer Default Rating (IDR) ‘B’;

–Senior Secured ‘B+’;

–Second-Lien Loan ‘B-’;

–Senior Unsecured ‘CCC+’.

The ratings and Outlook are all at the low end of their category. The ratings are restrained from a highly leveraged capital structure and a very limited margin of safety that is extremely susceptible to even a moderate downturn in advertising spend. The ratings are also restrained by the ongoing litigation disputes with Televisa. On a worst-case basis, the elimination of the Program License Agreement with Televisa would likely result in a downgrade of 1-2 notches on all ratings as we estimate Televisa’s programming accounts for over 35% of TV revenue. While there are other content alternatives for Univision to access besides Televisa (Venevision, RCN, Buena Vista, etc.) there could be significant differences in rate cards and programming costs versus existing arrangements. Renegotiation of the fees Univison pays to Televisa could increase by about 30% before affecting existing ratings (any increase in programming fees as a result of a settlement between the parties would at least offset current legal fees paid).

The ratings are still supported by the company’s underlying portfolio of assets which include duopoly TV stations and radio stations in most of the top Hispanic markets, with a national overlay of broadcast and cable networks.

For more information see the Fitch press releases dated March 4 and April 9 available on the Fitch web site at www.fitchratings.com.

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.”

Stumble it! | |