ITV Plc (ITV) may win back its investment-
grade ranking as the U.K.’s biggest commercial broadcaster
redeems debt and advertising revenue is boosted by the English
soccer team’s success in the European Championship.
Credit-default swaps tied to the London-based company’s
debt trade at levels implying an investment-grade rating of
Baa3, one step above its current junk Ba1 grade, according to
Moody’s Analytics. The company offered to buy back 250 million
pounds ($392 million) of bonds this week by dipping into its 801
million-pound cash holdings, driving swaps down as much as 26
percent this week to 225 basis points.
Chief Executive Officer Adam Crozier has been restructuring
ITV since his appointment in 2010, boosting online and digital
projects after the company lost its high-grade status when
advertising slumped amid the financial crisis in 2008. England’s
win over Ukraine on June 19 attracted the biggest peak audience
for any U.K. channel this year with 18.6 million viewers,
according to research group BARB, and advertising revenue will
increase as much as 17 percent this month because of the soccer
tournament, ITV said May 9.
“The market has been expecting them to return to
investment grade for a very long time, but as the management is
fairly new they were still in the process of deciding their
long-term strategy for their cash pile,” said Mark Chapman, a
London-based technology, media and telecoms analyst at
CreditSights Inc. “If England gets to the final, then there’s
scope for more positive surprise.”
Debt Buybacks
The company bought back about 662 million pounds of loans
and bonds in the past three years as part of a strategy to
reduce debt and interest payments, ITV spokeswoman Mary Fagan
said by e-mail June 20. She declined to comment on whether ITV
are actively seeking an investment-grade rating.
ITV is now offering to redeem its most expensive and
shortest-dated debt, the company said in a June 18 statement.
It said it will pay 117.5 cents on the euro for 188 million
euros of 10 percent bonds due in 2014. It will also tender for
parts of the outstanding 154 million pounds of 5.375 percent
notes due 2015, and 250 million pounds of 2017 bonds at a
minimum price of 104.25 pence and 108.25 pence on the pound
respectively. The deadline for investors to reply to the tender
is June 25.
Interest Charges
The buyback “makes the balance sheet more efficient by
reducing interest charges by about 17 to 18 million pounds on a
net basis,” Liberum Capital Ltd. media analyst Ian Whittaker
wrote in a June 18 report. It also “increases the chances of a
return to shareholders, probably in early 2013.”
ITV’s 2014 bonds climbed to 116.5 euro cents from 112.1
cents before the offer, and from 109.9 cents at the start of the
year, Bloomberg Bond Trader prices show. Spreads on the notes
plunged to 148 basis points more than similar-maturity
government debt from 364 basis points on June 15 before the
tender was announced.
The company had net debt of 921 million pounds, down from
1.3 billion pounds at the end of 2010, according to its 2011
results. It has a 200 million-pound term loan maturing in 2019
and the equivalent of 690 million pounds of senior unsecured
bonds, Bloomberg data show.
The buyback will save the company about 8 to 10 million
pounds in interest payments in 2013 resulting in a two percent
increase in estimated earnings per share, UBS AG media company
analyst Polo Tang wrote in a June 19 note.
England’s soccer team advanced from the group stages to the
quarter-final of the tournament this week and will play Italy on
June 24.
Advertising Boost
“ITV already gave guidance for a significant advertising
boost in June, so England probably needed to get out of the
group stage to hit what they’ve already promised,”
CreditSight’s Chapman said. With the debt buyback “ITV have now
ticked the credit metrics box, they just need to tick a few
others to get the rating step-up. It’s within their power now.”
ITV has risen four percent to 75.2 pence since the tender,
extending the stock’s gains to 10 percent this year and giving
the company a market capitalization of 2.9 billion pounds.
Of the 27 analysts tracked by Bloomberg, ITV has 13 buy,
seven hold and seven sell recommendations, with an average
target price of 96.89 pence. That implies an upside of 29
percent.
Leverage Cut
Standard and Poor’s upgraded ITV to BB+ on March 30 with a
stable outlook, and said in an April 27 report that it expects
the company to have a leverage ratio of about two times debt to
earnings before interest, tax, depreciation and amortization at
year-end 2012, down from 2.3 times in 2011. CreditSights’s
Chapman estimates that a successful buyback may cut gross
leverage by about 0.5 times.
“We could raise the ratings if ITV continues to reduce its
dependence on advertising,” SP analysts led by Milan-based
Patrizia D’Amico wrote in the report. “Rating upside could also
stem from stronger advertising market growth than we currently
anticipate.”
As credit-default swaps on ITV plummeted since the plan was
announced, the Markit iTraxx Crossover Index of swaps, which
includes the U.K. company, was 0.2 percent lower at 686 basis
points.
The contracts typically rise as investor confidence
deteriorates and fall as it improves. Credit-default swaps pay
the buyer face value if a borrower fails to meet its
obligations, less the value of the defaulted debt. A basis point
equals 1,000 euros annually on a contract protecting 10 million
euros of debt.
ITV was created in its current form in 2004 through the
merger of Carlton Communications Plc and Granada Plc. In 2000,
Granada had bought United News Media’s ITV television
channels. ITV was initially shaped in 1955 as a network of
regional stations to form a commercial rival to the publicly-
funded British Broadcasting Corp.
To contact the reporter on this story:
Stephen Morris in London at
smorris39@bloomberg.net.
To contact the editor responsible for this story:
Faris Khan at
fkhan33@bloomberg.net.
ITV Plc CEO Adam Crozier
Denis Doyle/Bloomberg
Chief Executive Officer Adam Crozier has been restructuring ITV since his appointment in 2010, boosting online and digital projects after the company lost its high-grade status when advertising slumped amid the financial crisis in 2008. England’s
Chief Executive Officer Adam Crozier has been restructuring ITV since his appointment in 2010, boosting online and digital projects after the company lost its high-grade status when advertising slumped amid the financial crisis in 2008. England’s Photographer: Denis Doyle/Bloomberg
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