News Column

Fitch Affirms CBS' IDR at 'BBB'; Outlook Stable

May 23, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BBB' Issuer Default Ratings (IDRs) of CBS Corporation (CBS) and its subsidiaries. Fitch has also affirmed the specific issue ratings assigned to CBS. A full list of ratings follows at the end of this release. The Rating Outlook for all of CBS' ratings is Stable. Approximately $6.4 billion of debt outstanding (including $440 million of commercial paper and excluding $1.6 billion at CBS Outdoor Americas, Inc.) as of March 31, 2014 is affected by Fitch's action.

KEY RATING DRIVERS

--The business risks inherent in CBS' operating profile along with Fitch's expectation that the company will maintain a conservative financial policy strongly position the company's credit profile within the current rating category.

--CBS' capital allocation strategy that continues to favor shareholder returns is incorporated into the ratings.

--Growing content licensing and distribution, affiliate and subscription revenues are improving CBS' revenue mix and are in line with the company's long-term objective to increase non-advertising revenue sources to 50% of total revenues.

--Outdoor Americas business segment initiatives are neutral to CBS' credit profile.

CBS' credit profile is strongly positioned within its ratings category providing the company with a material level of financial flexibility. In the absence of a formal leverage target, Fitch expects the company to maintain its rational approach to managing its leverage and to retain its conservative financial policy in the context of capital allocation strategy and participating in merger and acquisition activity.

Consolidated leverage increased to 2x as of the LTM period ended March 31, 2014 reflecting the incremental debt associated with CBS Outdoor Americas. The company's leverage, pro forma for the CBSS Outdoor Americas separation was 1.8x as of the LTM period ended March 31, 2014 reflecting a modest increase when compared with 1.6x leverage as of year-end 2013. Nonetheless, the leverage metric compares favorably to Fitch's 2.75x gross leverage target for the current ratings.

Share repurchases continue to be the centerpiece of CBS' capital allocation strategy. With annual free cash flow (defined as cash flow from operations less capital expenditures and dividends) expected to range between $1.3 and $1.4 billion, the company has significant flexibility within the current ratings to accommodate its capital allocation policy. CBS is on track to return approximately $6 billion of capital to its shareholders during 2014. This includes $1.5 billion from the company's recently completed accelerated share repurchase program, $1.2 billion of anticipated regular share repurchases and the balance consisting of the exchange of CBS' remaining stake in Outdoor Americas that will be included in the shareholder return calculation for 2014. The company repurchased approximately $2 billion of its class B common stock during the first quarter of 2014 including $1.5 billion in connection with an ASR transaction and $500 million repurchased on the open market. The ASR was funded with the debt issuance proceeds received in connection with CBS' Outdoor Americas initiative. CBS had approximately $3.43 billion of authorization remaining under its $6 billion share repurchase program as of March 31, 2014.

From Fitch's view, the pending separation of CBS Outdoor Americas and related transactions are in line with CBS' overall strategy to become a content centric business, grow non-advertising revenues and create a revenue base that is more stable and recurring. The contemplated transactions will reduce CBS' exposure to cyclical advertising revenues. Fitch believes that CBS' revenues generated from advertising will reduce to approximately 54% following completion of the transactions from 58% as of year-end 2013.

Fitch believes that CBS has sufficient capacity within the current ratings to accommodate a modest increase in its leverage expected from the anticipated separation of CBS Outdoor Americas. Fitch estimates that CBS has received approximately $2 billion of cash consideration for contributing the underlying businesses and assets comprising CBS Outdoor Americas, which were predominantly used to fund share repurchases.

Retransmission consent and reverse compensation revenues are among CBS' fastest growing revenue streams. Retransmission and reverse compensation revenues provide a stable and recurring element to CBS' revenue base which mitigates some of the volatility associated with advertising revenues. Additionally the high margin characteristic of these revenues will strengthen the company's operating profile. CBS aims to close the pricing gap between its current retransmission rate charged to MVPDs and the rates charged by other leading cable networks as CBS believes the current retransmission rates do not accurately reflect the relative value of the content broadcast by the network. To that end CBS expects its retransmission consent / reverse compensation revenue will grow to $1 billion by 2017 and to $2 billion by 2020. Obtaining its revenue objectives in large part depends on CBS' ability to maintain strong network ratings and retain its valuable sports programming rights portfolio including its rights to the NFL. Fitch believes that the combination of escalators built into existing agreements and anticipated rate increases in new deals that will be executed firmly place CBS on a path to achieve its revenue goals.

CBS' ratings reflect the strong competitive position of the CBS television network and studio as well as largely stable demand for CBS' various advertising platforms. The broadcast network, owing to its ratings strength, is well positioned to capture large viewing audiences amid an increasingly fractured media landscape. Fitch believes that demand for the television studio's content remains strong across all major end markets.

CBS' position as a leading television broadcast network and owner of an impressive inventory of content provides the company strategic options that would likely mitigate potential negative implications of an Aereo, Inc. victory in the courts. In Fitch's opinion an Aereo victory in the courts could diminish CBS' negotiating position with MVPDs over valuable retransmission consent revenues. The existence of Aereo's service or similar services as a viable alternative to gain access to local and network over the air television broadcasts will harden the MVPDs position and temper the anticipated growth rate of retransmission consent revenues, which broadcasters have become increasingly reliant upon. Ultimately, but unlikely in Fitch's view, MVPDs could elect not to enter a retransmission consent agreement with broadcasters and not carry the broadcast on their respective networks, placing the retransmission consent revenues in jeopardy. Fitch acknowledges that should the MVPDs pursue this strategy, changes to the retransmission consent model would evolve over a long period of time and not pose any near term threats to CBS' credit profile. Should such a downside scenario materialize, CBS could stop offering its content (primarily prime time programming and sport programming) over the air and convert into a cable network. However converting from a broadcast network to a cable network will present CBS with challenges including anticipated political backlash, the precarious position of CBS' network television affiliates, potential issues related to broadcast rights pertaining to sports leagues.

Fitch's ratings for CBS continue to be supported by a strong television and radio station presence in the top 25 U.S. markets, leading positions in first-run syndication, a robust library and pipeline of off-network syndicated programming and an increasing portion of carriage and re-transmission revenues. Re-transmission fees, and increasingly, reverse network compensation, remain a small portion of overall revenues but will make an increasingly meaningful contribution to operating profits, as they are stable, recurring and high incremental margins.

Rating concerns include an above average exposure to cyclical advertising revenue and the company's capacity to adapt to ever-changing media consumption patterns and technology platforms. Additional concerns center on the company's ability to balance escalating programming expense and production costs with the requirement to consistently deliver programing that drive incremental share of an increasingly fragmented viewing audience while maintaining or expanding operating margins.

Fitch continues to believe that CBS is well positioned to address the secular threats and opportunities presented by emerging alternative distribution platforms and continued audience fragmentation across the media and entertainment landscape. The emergence of alternative methods for the distribution, storage and consumption of content, attributable in large part to technology advances, has driven changes in consumer behavior presenting both risks and opportunities to CBS and other large media companies. CBS' Local Broadcasting business, particularly radio, will likely bear the largest impact of these trends and experience the largest audience declines.

Fitch also believes that large, well-capitalized content providers, such as CBS, will remain crucial to the industry. Fitch expects CBS will continue to distribute its owned content rationally and with the goal of maximizing its long-term profitability and franchise value. Further, in Fitch's opinion the proliferation of new distribution platforms and methods of consumption (smartphones, tablets) will continue to create new demand windows for CBS' content that Fitch believes are recurring and have growth potential.

CBS' liquidity position is strong and supported by $311 million of cash on hand as of March 31, 2014, $2 billion in available credit facilities (nearly all of which was available as of March 31, 2014), and expected free cash flow generation. CBS' revolver commitment expires on March 15, 2018. Scheduled maturities are well laddered and manageable considering expected free cash flow generation, reliable market access and backup liquidity. Approximately 22.5% of the company's debt outstanding as of March 31, 2014 (pro forma for the separation of CBS Outdoor Americas) is scheduled to mature over the next five years including $539 million during 2014 (including $440 million of commercial paper outstanding as of March 31, 2014)$200 million during 2016 and $400 million in 2017.

RATING SENSITIVITIES

Positive rating action would likely coincide with CBS adopting a more conservative financial policy highlighted with a gross leverage target of 2.25x or lower. Meanwhile CBS will need to demonstrate that its operating profile can sustain itself amid ongoing competitive pressures, changing media consumption patterns and evolving technology platforms.

Negative rating actions are more likely to coincide with discretional actions of CBS management including, but not limited to, the company adopting a more aggressive financial strategy or event driven merger and acquisition activity, that drive leverage beyond 3.5x in the absence of a credible de-leveraging plan. Additionally, negative rating actions could result should Fitch begin to observe a negative impact from alternative content distribution platforms and other forms of entertainment that is significantly larger than Fitch's expectations or a weakening of the company's television studio's ability to produce desired television content, or secure programming on its television networks that consistently deliver viewing audience and related advertising revenues.

Total debt at March 31, 2014 was $6.4 billion (excluding CBS Outdoor Americas' debt), which consisted primarily of:

--$440 million of commercial paper;

--$99 million senior unsecured notes due 2014;

--Approximately $5.8 billion senior unsecured notes and debentures maturing 2016-2042;

--$52 million senior unsecured notes issued at CBS' wholly owned subsidiary CBS Broadcasting, Inc., which are not guaranteed by CBS Corp.

--$109 million of capital leases and other obligations.

Fitch has affirmed the following ratings with a Stable Outlook:

CBS Corporation (CBS)

--Long-term IDR at 'BBB';

--Senior unsecured at 'BBB';

--Short-term IDR at 'F2';

--Commercial Paper at 'F2'.

CBS Broadcasting, Inc.

--Long-term IDR at 'BBB';

--Senior unsecured at 'BBB'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=831522

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

David Peterson

Senior Director

+1-312-368-3177

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

or

Secondary Analyst

Rolando Larrondo

Senior Director

+1-212-908-9189

or

Committee Chairperson

Sean Sexton

Managing Director

+1-312-368-3130

or

Media Relations:

Brian Bertsch, +1-212-908-0549 (New York)

brian.bertsch@fitchratings.com


Source: Fitch Ratings


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