Fitch: Pension, Accounting, Tax & Regulatory Issues Unlikely to Affect U.S. Media Credit Quality

The majority of defined benefit pension plans in Fitch’s media and entertainment coverage universe are currently underfunded. While Fitch expects materially larger amounts of cash flow dedicated to these plans, it should be accommodated at existing rating categories.

The median funding level for U.S. media and entertainment companies under Fitch’s coverage stood at 75% at fiscal year-end 2010, a modest improvement from 71% in 2009. The average unfunded pension liability per company was $545 million as of year-end 2010. More than half of the companies are below the 80% “at risk” threshold for underfunded plans. However, most companies are positioned to close the gap without negatively affecting their credit profiles.

Although there will be continued regulatory and legislative activity, Fitch expects the regulatory environment will remain relatively benign for content companies through at least the medium term. Although interrelated, Fitch expects the FCC’s agenda under Chairman Julius Genachowski to focus on distribution-related, more so than media-related, issues. Fitch does not anticipate the FCC will seek to further relax media ownership rules through the intermediate term. Fitch also does not anticipate much FCC or congressional reception to relaxing media ownership laws given the recent events at News Corp. and the focus on its wide-ranging asset portfolio. The FCC’s focus on the effective use of spectrum as part of its National Broadband Plan (NBP) could affect local broadcasters in the media space, and its proposals on program carriage disputes will have an affect on cable and broadcast networks (see the discussions below for details). Fitch also expects the FCC to continue fostering diversity of voices in media.

The ongoing convergence of the Financial Accounting Standards Board’s (FASB) U.S. GAAP and International Accounting Standards Board’s (IASB) International Financial Reporting Standards (IFRS) have spurred many updates and new accounting standards to U.S. GAAP accounting over the last five years (including changes to disclosures). The goal of these changes is to improve the quality of financial information provided by issuers and work toward converging the standards from each board, as per their updated memorandum of understanding (issued in September 2008 and reaffirmed in 2010). While some of these changes have had a direct impact on accounting policies for the companies in Fitch’s U.S. media and entertainment portfolio, the changes have not had a material impact on their credit profiles.

The full report, “Credit Encyclo-Media,” is available at http://www.fitchratings.com.