XE.com - TEXT-Fitch affirms Discovery Communications at 'BBB'

(The following statement was released by the rating agency)

July 31 - Fitch Ratings has affirmed Discovery Communications LLC's

(Discovery) Issuer Default Rating (IDR) and senior unsecured debt at 'BBB'. The

Rating Outlook is Stable.

Discovery's ratings are supported by the company's strong core brands, global

carriage, leverageable content, robust free cash flow 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.

The ratings and Stable Outlook reflect the following considerations:

--Discovery retains significant financial flexibility, 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 over $1

billion, driven by the high margins, content leveragability across markets and

geographic regions, and low capital intensity associated with the cable

programming business. Fitch estimates total leverage of 2.6 times (x) at June

30, 2012. Discovery therefore retains ample flexibility within the ratings for

share repurchases and moderate acquisition activity. Fitch expects 2012 share

repurchases to exceed the $1 billion Discovery repurchased in 2011. Debt

incurrence to fund share repurchase activity is incorporated into ratings up to

Fitch's 3.0x leverage threshold for Discovery's 'BBB' rating. Further, while

large-scale M&A activity is not anticipated given the dearth of cable network

assets available for sale, Fitch believes there is room at the 'BBB' level to

absorb some mid-sized acquisitions, underscored by Fitch's current belief that

the company would restore leverage to under 3.0x within a 12-month timeframe.

--Recurring, high margin affiliate revenue accounts for approximately half of

Discovery's overall revenue base. Fitch continues to view cable networks as the

strongest sub-sector of the media & entertainment industry predominantly due to

the carriage fees they receive from cable providers, which are recurring under

multi-year contracts with very high renewal rates and built in rate increases.

The multi-year nature of carriage contracts, historical renewal rates, ownership

of content and brand awareness give visibility to the business.

--Fitch expects renewal rates of carriage agreements with pay TV providers in

the U.S. to remain stable, given the 'must have' nature of Discovery's major

channels (namely Discovery and TLC). However, Fitch sees an increased risk that

Discovery will no longer be able to fully pass higher programming costs onto the

pay TV providers via higher affiliate fees, which could moderately pressure U.S.

margins. Pay TV providers face additional costs, a reduced ability to pass those

increases off to a mostly more vulnerable customer base, and proliferating

alternatives to traditional pay TV bundles. These operators are therefore

becoming increasingly resistant to paying higher affiliate fees. That said,

Fitch expects Discovery's programming costs to increase at a slower rate than

some of its peers, given absence of sports and a lower-cost suite of

programming. Additionally, Fitch believes that the top tier channels that can

continue to command audience share/ratings will continue to be a must-carry for

the distributors and will therefore retain leverage going forward. Any margin

pressure would be accommodated at current ratings, given the nearly 60% EBITDA

margins in the U.S. Network segment.

--The margins at Discovery's International Networks segment exceed 40%,

materially above its peers. The fact-based nature of the content enables

Discovery to generate programming aimed at a global audience, which can be

easily transferred to other regions with only minor costs. Rising global pay TV

penetration and digital conversion should drive mid- to high-single digit growth

in this segment over the intermediate term. International could be a focus of

future moderate acquisition activity. Discovery's launch of free to air channels

in select markets where pay-TV penetration is plateauing could enable the

company to generate moderate growth.

--Ratings are underpinned by the strength of the company's Discovery and TLC

brands, both of which reach nearly 100 million subscribers across the U.S. and

continue to generate solid ratings. These flagship channels are the main drivers

of the carriage and advertising revenue, and provide Discovery with significant

leverage in negotiating affiliate fees for its total portfolio. That said, the

two networks generate more than 60% of U.S. Networks revenue, and the company's

other networks do not have anywhere near the scale, audience or revenue

generating capabilities. Additionally, the genres of programming that Discovery

offers can be more easily replicated by other distribution outlets, and more

channels have stepped outside of their initial goal and overlapping with

Discovery programming. This is a mild concern, although Fitch currently believes

the downside risk on carriage revenues is not material and the downside risk on

advertising revenues is accommodated at the current ratings.

--Fitch continues to believe that over-the-top (OTT), or Internet-based,

television will not drive significant cord cutting or have a material impact on

Discovery's credit profile or free cash flow over the intermediate term. Fitch

expects Discovery to continue to sell only its already monetized older library

content to the SVOD distributors, such as Netflix and Amazon. In addition, Fitch

expects Discovery to continue to benefit from these high-margin digital sales.

That being said, Fitch does see incremental risk relative to some other original

content providers, given the easily replicable nature of Discovery's content.

--Fitch acknowledges that John Malone has an estimated 22% voting control of

Discovery (and 30% with respect to the election of common stock directors) and

has been linked to aggressive shareholder-friendly actions in the past. Fitch

believes that Mr. Malone is comfortable with the company's financial strategy

and will not be seeking a more aggressive capital structure. Additionally, Fitch

believes that Advance/Newhouse, which has approximately 25% voting control (34%

economic stake), as well as consent rights over a variety of corporate actions,

has traditionally operated on a fiscally conservative basis, further mitigating

any governance concerns.

Liquidity is solid, particularly given the absence of maturities until $850

million comes due in 2015. Liquidity at March 31 consisted of $1 billion of cash

and an undrawn $1 billion revolving credit facility (RCF) that matures in

October 2015. Liquidity is further supported by Discovery's annual free cash

flow, which Fitch expects to exceed $1 billion.

Pro forma debt at March 31, 2012 was $5.2 billion and consisted primarily of:

--$850 million of 3.7% senior unsecured notes due 2015;

--$500 million of 5.625% senior unsecured notes due 2019;

--$1.3 billion of 5.05% senior unsecured notes due 2020;

--$650 million of 4.375% senior unsecured notes due 2021;

--$500 million of 3.3% senior unsecured notes due 2022;

--$850 million of 6.35% senior unsecured notes due 2040; and

--$500 million of 4.95% senior unsecured notes due 2042.

WHAT COULD TRIGGER A RATING ACTION?

An upgrade is unlikely over the medium term, given the company's stated leverage

targets and the limited depth of brands. Future upgrades would only be

considered from the combination of the following: 1) an explicit commitment from

management and a compelling rationale for Discovery to operate at a more

conservative leverage metric and

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