Moody’s has placed Comcast’s credit ratings under review for a potential downgrade following news that it plans to spin off NBCUniversal and Sky into a separate company.
In a statement, Moody’s Ratings Corporate Finance Group vice president Neil Mack warned that Comcast’s “reduced revenue diversification” following the move would concentrate the remaining entity’s exposure to “intensifying competition in broadband end markets.” He added that the “credit resilience of cable broadband business models remains under pressure due to debt leverage increasingly in conflict with negative operating trends,” raising concern among investors.
“While the company’s excellent liquidity and financial flexibility are supportive of the current credit profile, the negative secular pressures buffeting Comcast’s broadband-focused Connectivity and Platforms segment are heightening overall business risks,” the firm noted in a press release on Tuesday. “Visibility into the potential sustained success of Comcast’s competitive response is limited currently, with broadband share across its footprint expected to continue to steadily contract over a multi-year period given current competitive intensity. The company’s smaller Content and Experiences segment also tends to be more vulnerable to economic cyclicality and has been negatively impacted by consumer demand weakening due to inflation, job market pressures and other economic uncertainties in the past.”
Factors that will be taken into consideration in Moody’s review include the media conglomerate’s spin off closing upon the receipt of necessary approvals, as well as an assessment of the remaining Comcast entity’s business and operating strategies and expected post-transaction debt capital structure, liquidity and financial policies.
“The planned separation of the company’s businesses could result in downgrade pressure to Comcast’s rating when we assess a high likelihood that the transaction will close. Furthermore, if the pace of domestic broadband residential customer declines does not materially slow over the coming quarters, Comcast’s ratings would face potential downgrade pressure regardless of the loss of diversified revenue from the planned spin-off,” Moody’s continued. “Comcast’s ability to profitably increase revenue and steadily win new customers in its domestic wireless service and business services connectivity segments, as well as manage secular pressures in linear video to maximize cash flow, will also factor into
our ratings consideration.”
Ratings that could be impacted by the review include Comcast’s A3 senior unsecured debt ratings, (P)A3 senior unsecured shelf rating, A3 senior unsecured bank credit facility rating, (P)Baa1 subordinate shelf rating and (P)Baa2 preferred shelf rating. It would also impact ratings for Comcast’s subsidiaries Comcast Cable Holdings, LLC, Comcast Cable Communications, LLC, Comcast Holdings Corporation, US WEST Capital Funding, Inc. (Old), NBCUniversal Media, LLC, Sky Limited and Sky Group Finance Plc.
The move by Moody’s comes a day after S&P Global put Comcast on a negative credit watch, warning that the firm would “likely view RemainCo as a weaker business than the combined entity” despite management’s stated commitment to maintain an investment-grade balance sheet.
“Without the benefit of business diversification and the more competitive landscape for domestic broadband, it’s likely we will reconsider the 2.5x downgrade threshold for the ‘A-’ rating, and could tighten that threshold,” S&P said. “In assessing the ‘A-‘ rating on Comcast (RemainCo), we will weigh management’s ability to reduce leverage to a level consistent with our thresholds for the stand-alone domestic connectivity business.”
The tax-free spin off is expected to be completed in the next year, subject to the satisfaction of customary conditions, including final approval by Comcast’s board of directors, receipt of tax opinions, regulatory approvals and completion of financing arrangements. Comcast expects to retain a stake of up to 19.9% ownership position in NBCUniversal, which will have the same dual-class share structure, for up to one year after the completion of the spin, which it intends to monetize in a tax-efficient manner over time.
