Rating Action: Moody's affirms Activision Blizzard, Inc.'s Baa1 senior unsecured ratings; outlook stable
Global Credit Research - 24 Jul 2020
New York, July 24, 2020 -- Moody's Investors Service ("Moody's") affirmed Activision Blizzard Inc.'s ("Activision") Baa1 senior unsecured debt ratings. The affirmation is supported by an effective pivot and rebound against strong competition over the past few years, improved credit metrics following significant debt reduction, and a sizeable cash balance. The affirmation also reflects the favorable evolution of industry fundamentals for publishers like Activision, solid revenue and cash flow growth opportunities, a strong commitment to conservative metrics and its Baa1 rating credit profile, and its ability to continuously develop quality content to keep its competitive edge in the evolving video game industry. The rating outlook is stable.
..Issuer: Activision Blizzard, Inc.
....Senior Unsecured Bank Credit Facility, Affirmed at Baa1
....Senior Unsecured Regular Bond/Debenture, Affirmed at Baa1
..Issuer: Activision Blizzard, Inc.
....Outlook, Remains Stable
Activision Blizzard, Inc. ("Activision") is one of the world's leading video game producers in the growing but significantly fragmented gaming industry. The company possesses strong revenue diversification across the globe and in multiple genres and gaming platforms. It has a proven track record of developing profitable and sustainable franchises with international gaming community avidity such as Call of Duty, World of Warcraft, Overwatch, and Candy Crush, among others. Despite increased competition, the company's restructuring during 2019 and transfer of Destiny's publishing rights to Bungie, Activision has been producing strong results. In 2020, we believe the company is benefiting from its positive operating momentum along with being a healthy beneficiary of the strong stay-at-home environment, which we believe both accelerated growth in the gaming community as well as materially increased engagement. We believe that the momentum will slow post the COVID-19 crisis, but still provide industry expansion benefits over the intermediate term. The company's fundamental position is strengthened by several of its top-selling games moving into mobile free-to-play, and taking advantage of eSports opportunities, each of which provide additional revenue diversification benefits. Moody's recognizes that the company's past operational performance tended to fluctuate based on the release schedule and consumer receptivity of its games as compared to competitor games. However, historical seasonality has and will continue to dissipate due to a greater volume of digital in-game content between major game launches, transitioning existing titles to new popular genres such as mobile free-to-play, and new revenue streams which are spread evenly across the year such as expansion of downloadable content revenues, eSports and mobile advertising. With strong user engagement for its franchises, growing recurring revenues, a good growth trajectory, and a strong balance sheet, the company is well-positioned to sustain credit metrics and strong financial flexibility to support its credit rating over the long-term. We believe that the company has significant financial flexibility largely based upon its strongly positioned balance sheet, its meaningful annual free cash flow and its large cash balance which well exceeds its debt.
Activision's gross debt-to-EBITDA leverage was 1.4x (including Moody's adjustments) for the last twelve months ended 3/31/2020, and we believe that without any new debt financed investment opportunities, it will decrease further during the next 12-18 months due to exceptional performance during the COVID-19 stay at home environment before considering the leverage impact from any new debt issuance. We believe that the company's Debt-to-EBITDA leverage will remain around the 1.5x range or lower over the medium term before considering any new debt issuance and absent any large acquisitions. Although the company is exposed to revenue concentration risk among some of its key titles, Activision's sizable $5.9 billion cash balance (as of 3/31/2020) which exceeds reported balance sheet debt by more than 2x, its low gross leverage, and significant cash flow generation provides the company with significant liquidity that also firmly supports the company's credit position.
There were no material environmental considerations in the analysis of Activision Blizzard's credit profile. Exposure to social risks for video game publishers is moderate and largely stems from data security risks for companies that transact with large amounts of confidential data such as credit card details, personal information and other types of sensitive records that could be subject to legal, regulatory or reputational issues in the event of a breach. Moody's considers the COVID-19 outbreak as a social risk and the crisis has caused people to lock down and/or spend more time at home which has temporarily resulted in greater consumption and engagement of Activision Blizzard's products and stronger revenue generation. In this regard, Activision's social risks are in line with social risk for the video game sector in general.
Governance considerations that Moody's considers in Activision's credit profile is the company's conservative financial policy. The company has a history of operating with low leverage, conservative balance sheet management, and robust liquidity. Activision pays dividends annually and has a $1.5 billion share repurchase program that ends February 2021. Moody's believes management remains committed to a credit profile consistent with its Baa1 ratings and prefers to retain its excess financial capacity and balance sheet flexibility should an opportunistic acquisition come up in the future
Activision Blizzard's excellent liquidity profile reflects our expectations for strong annual free cash-flow of more than $1 billion, with a significant current cash and marketable securities balance of $5.9 billion as of 3/31/20, and a $1.5 billion revolving credit facility that is undrawn that has full availability on a same day basis. The next significant maturity is in September 2021 when the $650 million senior unsecured notes come due, which we expect will be refinanced well in advance of the maturity date. Although the $1.5 billion revolving credit facility is small relative to the size of its revenue base, we believe that the company relies more on its cash balance than the revolver and we do not expect the company to draw down on the revolver given strong free cash flow generation. Additionally, the company pays a moderately-sized annual dividend ($283 million during 2019) but given the significance of its free cash flow generation and large cash levels, it does not materially weigh in on risk at these levels. The credit facility consists of a total net debt ratio covenant of 3.75x. We expect the company to remain well in compliance with these covenants.
The stable outlook reflects Moody's expectation that Activision Blizzard will continue to be a leader in the video game market and deliver desirable high-quality premium content. The outlook also assumes that the company will remain a competitive leader in the sector, with successful expansion across all platforms and into new revenue streams such as eSports, advertising, and free-to-play games. The outlook also assumes gross debt-to-EBITDA leverage (including Moody's adjustments) will remain within the 1.5x to 2.0x range or less, liquidity will remain robust, and the company's senior management is committed to sustaining credit metrics and strong liquidity consistent with the Baa1 long-term debt rating.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on the ratings could occur if product and platform diversity increase alongside revenue growth, franchise game engagement remains strong, the company sustains a leading industry position, gross leverage is sustained under 1.5x (incorporating Moody's standard adjustments), cash liquidity remains high, and management commits to sustaining the stronger metrics to support a higher rating.
Downward pressure on the ratings could occur if the company's leading franchises experience deteriorating leading positions over time due to failed strategic pivots in the face of competitive disruption such that fundamentals become pressured such as an unexpected trend of degradation in existing game avidity, and erosion in the community customer base along with an inability to replace weakening franchises with new ones. A downgrade could also occur if the company's liquidity position materially dissipates or leverage is expected to be sustained over 2.0x (including Moody's standard adjustments). A material shift in the direction or the financial policy of the company that does not balance the interests of debt holders with equity holders that could increase credit risk could also lead to a negative rating action.
Activision Blizzard, Inc., based in Santa Monica, CA, is a global game developer and publisher across every major gaming platform, including PC, console, tablet, mobile, and handheld. Its franchises include Activision's Call of Duty® and Skylanders®, Blizzard Entertainment's World of Warcraft®, StarCraft®, Diablo®, Hearthstone®: Heroes of Warcraft(TM) and Overwatch®, and King's Candy Crush(TM), Pet Rescue(TM) and Farm Heroes(TM). Consolidated net revenue for the last twelve months ended March 31, 2020 was about $6.5 billion.
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
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These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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Neil Begley Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Lenny J. Ajzenman Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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