Industry Economic And Ratings Outlook:
The Media And Entertainment Outlook Brightens,But Regulatory Clouds Gather
Standard & Poor's Ratings Services' credit outlook for the U.S. media and entertainment industry continues to look up,with increasing rating stability, based on economic and industry data, and despite a modest drag from protractedsevere winter weather. Although downgrades outpaced upgrades in 2011-2013, the downward rating trend reversedfor the first quarter of 2014. For many U.S. issuers in this industry, we now expect the rating trend will beneutral-to-positive in 2014. Key inputs to this outlook are GDP growth modestly above the economy's long-term trend,a pick-up in consumer spending, and a decrease in unemployment to less than 7%. We also expect U.S. investordemand for speculative-grade debt to remain strong, providing liquidity to low-rated companies pursuing refinancing,and to investment-grade companies pursuing consolidating acquisitions. We currently don't expect meaningfulrepercussions of the Federal Reserve tapering its bond purchases slightly faster than previously indicated.In contrast to an improving economy, we see potential risks from increased regulatory and legislative activity. Weexpect that the FCC will pursue a number of initiatives in 2014 that could have longer-term ratings implications for themedia and entertainment sector. This includes clarification of TV ownership rules, revised retransmission consent and joint services rules, rules for the broadcast incentive spectrum auction that we expect to occur in 2015, and a newnetwork neutrality rule. In addition, on April 22, the Supreme Court will hear oral arguments in the case of Aereo Inc.versus the TV broadcasters and networks, which, if the court rules in Aereo's favor, could fundamentally alter the U.S.TV broadcast business. Finally, the U.S. Congress has expressed a desire to modernize the nation's communicationsand copyright laws. This would likely be a multiyear process involving both houses of Congress, multiplecongressional committees, and federal regulatory bodies.We still expect some areas of rating weakness will persist, including subsectors in structural decline, primarily intraditional print-based media. Additional downgrades could occur among overleveraged issuers that underestimatedrisks in their original business plans, relating to acquisitions, dividend recapitalizations, or leveraged buyouts. As of March 31, 2014, stable rating outlooks represented 76% of all U.S. rated issuers, negative outlooks 18%, positiveoutlooks 5%, and developing outlooks (indicating the possibility of an upgrade or downgrade) 1%.
Key economic drivers of the media and entertainment business--and of ad spending in particular--include GDP andconsumer spending. Consumer confidence is critical to consumer spending, and relies heavily on job growth trends.Wealth factors including home prices, stock prices, and gas prices also play a role in consumer confidence. Our base-case economic forecast (as of March 24, 2014) indicates 2.8% growth in 2014, followed by 3.2% in2015--exceeding the roughly 2.5% figure that we regard as a very long-term trend of GDP. This forecast assumes theFed starts tapering off its purchasing of Treasury securities in 2014. We expect consumer spending growth to pick upmodestly, to 2.9% in 2014 and 3.1% in 2015. We base this expectation on gradual job gains, continued strong auto
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