Spain-Based Education And Media Group Prisa Downgraded To 'B-' On High Leverage And Weaker Cash Flows; On Watch Negative

  • Promotora de Informaciones S.A.'s (Prisa) 2019 earnings and free operating cash flow (FOCF) were weaker than expected and will likely remain below our previous forecast in 2020.
  • In addition, Prisa was unable to reduce its debt after its sale of Media Capital to Cofina failed, so we expect adjusted leverage to remain above 8x in 2020.
  • These factors, together with the impact of COVID-19 on the group's operations, will likely reduce Prisa's liquidity and covenant headroom over the next few quarters.
  • We are therefore lowering our issuer credit rating on Prisa to 'B-' from 'B' and placing it on CreditWatch with negative implications.
  • The CreditWatch indicates that we could lower the rating over the next few months after we reassess the sustainability of the group's capital structure and covenant headroom for the next few quarters.
FRANKFURT (S&P Global Ratings) March 25, 2020--S&P Global Ratings today took the rating actions listed above. Prisa is unlikely to deleverage this year, owing to weaker than expected profitability, exacerbated by the impact of COVID-19.
We lowered the ratings because we forecast our adjusted leverage ratio for Prisa will reach 8.4x-8.9x in 2020, an increase compared with our previous expectation of leverage reducing to 5.0x-5.5x (see "Promotora de Informaciones S.A. Upgraded To 'B' Following Equity Raise And Purchase Of Santillana Stake; Outlook Stable," published May 1, 2019, on RatingsDirect). Prisa will not be able to partially repay its debt since its disposal of Media Capital failed. The group will most likely start the disposal process again, which can take a long time given Media Capital's underperformance in 2019, subdued prospects for TV advertising in 2020, and the weak economic environment as a result of the COVID-19 pandemic. In addition, we don't expect deleveraging in 2020 because we forecast weakening of operating performance and EBITDA generation in 2020 versus 2019. We expect absolute EBITDA will decrease because of the declining profitability of Prisa's operations in structurally pressured media sectors (TV advertising, radio, and print media); anticipated volatility in Prisa's book business; and expected negative foreign currency impact on earnings, exacerbated by the impact of COVID-19.
We also anticipate further deterioration of FOCF in 2020 will weaken Prisa's credit quality.
We expect Prisa's FOCF to turn negative in 2020 due to lower earnings, expected working capital outflows due to Prisa's Santillana business (some cash collections for books will shift to the first quarter of 2021), and sizeable consolidated capital expenditure (capex). Our forecast of weakened FOCF also incorporates an increase in interest payments on the company's loans by an estimated €5 million–€6 million for 2020 versus 2019. A margin step-up of 50 basis points will kick in in April 2020 because Prisa will not achieve a debt reduction of €275 million predefined in the debt documentation. Although we expect EBITDA interest coverage to remain above 2x in 2020, we forecast euro-denominated earnings, generated in Spain and Portugal, to only roughly cover interest, and foresee a risk of a currency mismatch between earnings and debt.
There is a risk of a breach of Prisa's net leverage covenant in the second half of 2020 due to high debt and subdued earnings.
We put the ratings on CreditWatch negative because Prisa's leverage is increasing, due to the company's failure to sell Media Capital, combined with the impact of COVID-19. As a result, we need to assess the sustainability of its capital structure relative to its future free cash flow generation profile. In addition, in our view, the likelihood of a breach of the leverage covenant linked to the company's revolving credit facility (RCF) will increase during the second half of 2020 when the leverage covenant testing level steps down to 5.1x as of Dec. 31, 2020, from the current 5.6x. We nonetheless expect that Prisa's liquidity sources, including cash from the now fully drawn €80 million RCF, and positive funds from operations will cover the company's cash uses until Dec. 31, 2020.
The CreditWatch indicates that we could lower the rating by at least one notch if the group's covenant headroom diminished over the next few months, increasing the risk of a covenant breach without a plan to prevent it; or if we believed that Prisa's capital structure has become unsustainable.
We intend to resolve the CreditWatch over the next few months after reassessing Prisa's operating performance, cash flow generation, and liquidity position, as well as the sustainability of its capital structure.
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