Fitch Ratings has assigned a 'BBB' rating to Discovery Communications,
LLC's (Discovery) proposed 10- and 30-year senior unsecured note
offering. The Rating Outlook is Stable. The proceeds will be used for
general corporate purposes, and Fitch expects the majority to be
deployed for share repurchases.
Discovery will issue the senior notes under the senior indenture dated
Aug. 19, 2009. The notes will rank pari passu with Discovery's existing
and future unsecured and unsubordinated indebtedness. Like all the other
senior unsecured debt issued at Discovery, the new notes are guaranteed
by Discovery Communications Inc. (Guarantor). Similar to the existing
bonds, covenants are limited. There is a limitation on liens of up to
10% of the Guarantor and its subsidiaries' total consolidated assets (in
addition to standard carveouts) and a change of control provision that
is triggered if any person becomes the beneficial owner of 50% or more
of the voting stock of Discovery or the Guarantor and the ratings on the
newly issued notes are downgraded below investment grade. Other change
of control triggers include a majority change in the Board of Directors,
the dissolution of the Guarantor, and/or if all or substantially all of
Discovery's assets are sold, if any of the aforementioned are followed
by a downgrade below investment grade. Fitch notes that there are cross
default/cross acceleration provisions in regards to debt in excess of
$100 million.
The ratings are supported by the company's strong core brands, global
carriage, leverageable content, growth prospects and solid credit
metrics. Ratings concerns continue to center on the significant
contribution of cyclical advertising revenue, a competitive landscape of
similar programming on other cable channels, the general volatility
associated with hit-driven content and the company's dependence on the
Discovery and TLC brands.
Fitch expects substantially all of the proceeds to be used for share
repurchases. Discovery has $1.6 billion remaining under its recently
increased $3 billion share repurchase authorization. Such activity is
well within the company's 'BBB' ratings. Discovery retains significant
financial flexibility in its credit profile, given solid free cash flow,
strong credit protection metrics for the ratings category, and a minimal
near-term maturity schedule. Fitch expects annual free cash flow of
nearly $1 billion, driven by the high margins, leveragability across
markets and geographic regions, and low capital intensity associated
with the cable programming business.