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Fitch Rates Discovery's Proposed Note Offering 'BBB'

Thursday, May 10, 2012 11:13 AM

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.


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