Universal Music Group received two strong ratings by credit ratings agencies on Tuesday (May 31), the company’s first as a standalone company since spinning off from Vivendi last September.
Moody’s Investors Service gave UMG a Prime-2 short-term credit rating and a Baa1 long term credit rating with stable outlook. Moody’s defines its P-2 rating has having “a strong ability to repay short-term obligations.” Baa is Moody’ fourth-highest long-term rating – behind Aaa, Aa and A – and denotes “medium-grade and subject to moderate credit risk.”
S&P Global Ratings assigned UMG an A-2 short term credit rating and BBB long term credit rating with stable outlook. A-2, S&P’s second-highest short-term credit rating, means the company has a “satisfactory” capacity to meet its financial commitments. S&P defines BBB as having “adequate capacity to meet financial commitments, but more subject to adverse economic conditions” than AAA, AA and A long-term ratings.
“We are pleased that, in the inaugural ratings since our public listing, the rating agencies have recognised our strong credit attributes,” Boyd Muir, UMG’s CFO and president of operations, said in a statement. “Both agencies highlighted our leadership in the music industry, best-in-class catalogue, recurring and well-diversified revenue streams and low leverage as key drivers of these solid ratings. The Baa1/BBB rating assignment is another positive recognition in our early days as a stand-alone publicly listed company.”
Both Moody’s and S&P believe UMG will post a mid-single-digit growth rate in the coming two years (S&P forecasts 6% to 8% annual revenue growth). Both agencies based their rating on the growth coming from increased consumer adoption of on-demand streaming platforms and new licensing opportunities in social media, fitness and gaming. S&P highlighted the opportunities for digital expansion in countries such as France, Japan and Germany, where physical sales are relatively high, and gains from higher prices for music subscription services in mature markets.
But the agencies also highlighted risks in the music business and UMG’s corporate structure. S&P believes UMG “lacks diversification,” especially compared to video content companies such as Disney. “The group’s exclusive music focus suggests it is exposed to the music industry’s continued evolution and technological changes, as well as changing customer preferences.” Similarly, Moody’s took into account risks related to evolving technologies “which in the past have prevented the company from monetizing its content,” although it does not foresee such a disruption in the near future. S&P analysts also weighed the risk of potential changes – within the industry or mandated by legislation – that would give artists a greater share of revenue, slowing UMG’s growth and squeezing its margins.
UMG had 2.6 billion euros of borrowings, including 1.45 billion euro in drawn revolving credit facilities and 1 billion-euro term loan that were used to repay borrowings from former parent company Vivendi, according to its 2021 annual report. With 585 million euros of cash and cash equivalents, UMG’s net debt was 2 billion euros. In 2021, UMG had revenue of 8.5 billion euros and earnings before interest, taxes, depreciation and amortization of 1.69 billion euros. The company calculated its debt-to-EBITDA ratio as 1.2 on Dec. 31, 2021, according to its 2021 annual report.
Ratings agencies focus on the amount of cash a company has to maintain its debt. Likewise, lenders typically set limits on the amount of debt a company can take. UMG’s revolving credit facility and term loan both require a financial net debt to EBITDA ratio of 4.0 or lower, according to UMG’s 2021 annual report. Both Moody’s and S&P believe UMG will maintain a debt-to-earnings ratio below 2.0. S&P believes that number could decrease to 1.0 by 2024 but could increase if UMG uses debt for catalog purchases or increases shareholder remuneration through larger-than-planned dividends or share buybacks.