Discovery Debt Ratings Under Downgrade Review by Moody's

David Zaslav

Discovery Communications boss David Zaslav made $49.9 million in 2012, slightly below the $52.4 million that he had earned in 2011. But that was enough to see him yet again rank just behind Moonves in terms of compensation for bosses of big entertainment companies. The year-over-year drop was due to changes in the value of his stock options, even as the company’s shares rose more than 50 percent last year.

The firm cites "the company's appetite for leverage to finance share repurchases and acquisitions, as well as its long history of incrementally increasing leverage."

Credit ratings agency Moody's Investors Service said Tuesday it has placed the debt ratings for Discovery Communications under review for a possible downgrade.

"This action follows the company's disclosure that target debt-to-earnings before interest, taxes, depreciation and appreciation leverage is rising to 3.25x-3.4x on a reported basis," it said.

Management mentioned the new target on its third-quarter earnings conference call earlier in the day, saying it would allow it to buy back more stock.

"Since 2010, Discovery's leverage has risen steadily due to share repurchases and acquisitions despite the company's good operating performance," Moody's said. "The review for downgrade will focus on the company's shift in financial policy, capital allocation and business trends."

It currently has a Baa2 ratings on a key portion of the company's debt. But the new guidance "positions Discovery more comparably with a Baa3-rated company," the ratings agency said. Baa3 is the company's lowest investment-grade rating.

Added Moody's: "The company is managing its financial policies more aggressively within its previously stated preferred leverage range (below three times as defined‎ by the company) over the last few years with share repurchases exceeding free cash flow generation in addition to the leveraging SBS/Eurosport acquisitions. The revised leverage target will likely increase debt-to-EBITDA leverage of 3.2x (incorporating Moody's standard adjustments) ... This shift in policy is occurring in the context of an industry under pressure, evidenced by the broad market experiencing declining video subscribers and flat to weak ad revenues. The company's appetite for leverage to finance share repurchases and acquisitions, as well as its long history of incrementally increasing leverage, is not indicative of a commitment to maintaining credit metrics comparable with peers in the current rating category."