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The Week Ahead: Net neutrality rules end as judge decides AT&T/Time Warner case

Judge OKs AT&T/Time Warner, Opening A Potential Bidding War For FOX Assets

Technology, Media & Telecom

Kagan MediaTalk - Episode 2: TV’s Summer Soccer Fever

50 Years Of Altman Z-score, And PD Model Fundamentals – Case Study General Motors


Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

The Week Ahead: Net neutrality rules end as judge decides AT&T/Time Warner case

Two developments this week will shape the future of convergence of the media and communications sectors, as federal net neutrality protections end June 11 and a U.S. district court judge decides June 12 whether to permit or block the combination of AT&T Inc. and Time Warner Inc.

From K Street to Main Street

In May, the Federal Communications Commission set June 11 as the date the order repealing the U.S. agency's net neutrality rules would officially go into effect. The order, adopted in a contentious party-line vote in December 2017, reclassified broadband as a Title I service under the Communications Act versus the Title II classification adopted in 2015 under the Democratic administration. The agency has less regulatory power over Title I services, meaning that it cannot impose tariffs or set rate regulations over internet service providers under the new classification. In addition, the order also eliminated the FCC's net neutrality rules, which prohibited network operators from blocking or throttling legal internet traffic or prioritizing certain traffic in exchange for payment.

Though the rule change had received the necessary approvals in May, the FCC chose June 11 as the effective date of the new framework to give providers time to comply with the new requirements.

The three Republican commissioners at the FCC who voted in favor of the new order have all said the rule change will have no negative impact on consumers. In fact, Republican FCC Chairman Ajit Pai said June 7 that the return to a Title II classification for broadband service will actually benefit consumers by encouraging deployment and competition.

"It's going to mean better, faster, cheaper access for American consumers," Pai said.

Democrats, though, have warned the rule change will hurt consumers by allowing internet service providers to block, throttle or prioritize traffic as they see fit.

"I don't think anything gets better for consumers with the rollback of these rules," FCC Commissioner Jessica Rosenworcel, a Democrat, said June 7 in response to Pai's remarks.

Meanwhile, the following day, U.S. District Court Judge Richard Leon, who was appointed by President George W. Bush, will issue his decision on whether to block or permit AT&T's pending purchase of Time Warner. For six weeks, lawyers for the U.S. Justice Department and the two companies battled back and forth over whether the proposed deal would hurt competition in the video marketplace. The Justice Department claimed the combination would give the resulting entity too much power in the pay TV and online video marketplace, leading to higher prices and fewer choices for consumers. AT&T disputed that claim, arguing the synergies created by the merger would actually benefit consumers and lead to greater innovation.

According to The New York Times, Leon is expected to give a condensed version of his opinion at roughly 4 p.m. ET on June 12, with the full opinion also set to be released around the same time. Throughout the case, analysts and legal experts have remained divided on Leon's likely decision.

A former FCC Chairman's take

In an interview for C-SPAN's "The Communicators" series released June 7, former FCC Chairman Tom Wheeler, a Democrat who spearheaded the adoption of the 2015 Open Internet order, said he saw the repeal of the net neutrality rules and the proposed combination of AT&T and Time Warner as related.

"You look at what AT&T is doing — they are moving into content," Wheeler said, noting that the cable giant Comcast Corp., which like AT&T is an internet service provider and pay TV operator, is also pushing deeper into content, trying to add 21st Century Fox Inc. assets to its NBCUniversal Media LLC stable.

"What the absence of the Open Internet [order] does is to make that even more attractive because it says to the party that controls the network that delivers the content … that they can discriminate and favor their content," Wheeler said.

The former FCC chairman added he is looking forward to hearing Leon's ruling, but had no prediction on the outcome.

"The Windex on my crystal ball has run out," he said.

SNL Image
June 13 The Senate Commerce Committee will convene a hearing entitled "Oversight of the National Telecommunications and Information Administration." This hearing will examine the Commerce Department's NTIA and the agency's role in managing federal spectrum and representing U.S. interests with the global internet multistakeholder community. Also, the hearing will look at how the NTIA is working to deliver a modern National Broadband Map capable of providing better service availability data.
June 13 The Senate Committee on Homeland Security and Governmental Affairs will hold a business meeting. One of the bills to be considered at the meeting is the Cyber SAFETY Act of 2018, which would amend the Homeland Security Act of 2002 to authorize the Secretary of Homeland Security to designate cybersecurity technologies that qualify for protection under systems of risk and litigation management.
June 13 The Senate Committee on Environment and Public Works will hold a hearing entitled "Innovation and America's Infrastructure: Examining the Effects of Emerging Autonomous Technologies on America's Roads and Bridges."
June 14 The House Subcommittee on Digital Commerce and Consumer Protection will hold a hearing entitled "Understanding the Digital Advertising Ecosystem."
The FCC:
June 11 The FCC's net neutrality rules officially end.
June 12 The FCC's Technological Advisory Council, comprised of a diverse group of leading technology experts, will meet.
June 14 The FCC's Disability Advisory Committee will meet. The commission provides advice and recommendations to the agency and aims to facilitate the participation of people with disabilities in proceedings before the commission.
The courts:
June 12 With closing arguments having wrapped in the Justice Department's antitrust lawsuit against the AT&T/Time Warner deal, both sides are now awaiting a decision. A ruling is expected by June 12.
Industry events:
June 11 The Federal Communications Bar Association will offer a primer on regulatory approval for mergers, acquisitions and transfers of control.
June 11 - 13 The M-Enabling Summit, designed to promote accessible technologies and environments for senior citizens and persons with disabilities, will take place in Washington, D.C.
June 12 The Open Markets Institute will hold an event titled "Breaking the News: Free Speech & Democracy in the Age of Platform Monopoly."
June 12 The Brookings Institution will hold an event titled "The dawn of a new era: Opportunities and challenges of artificial intelligence."
June 12 The Heritage Foundation will hold an event titled "Blockchain: What It Is and How It Will Change Lives."
June 12 The NTIA will hold a Spectrum Policy Symposium.
June 13 Securing America's Future Energy will host an event titled "America's Workforce and the Self-Driving Future."
June 13 The Federal Communications Bar Association will host a luncheon on the launch of 5G services.
June 14 The Cato Institute will hold an event with FCC Chairman Ajit Pai on net neutrality.
June 15 New America's Open Technology Institute will host an event titled "Harnessing Satellite Spectrum for Broadband: Will Incumbents Sell, Stay, or Share?"
Cybersecurity events:
June 13 The 2018 Cybersecurity Leadership Forum will consider how leaders in government and tech are changing the paradigm when it comes to cybersecurity.

Stories of note:

FCC leaders give contrasting visions of a post-net neutrality world

As federal internet of things legislation proves elusive, US states push ahead

Experts: FCC nominee's unknown policy views 'an advantage' for confirmation odds

Ahead of internet summit, FDA cracks down on websites selling illicit opioids

Infosecurity Europe: GDPR rules help to make privacy by design the new normal

FCC takes next steps to open up high-band spectrum for 5G uses

Technology, Media & Telecommunication
Judge OKs AT&T/Time Warner, Opening A Potential Bidding War For FOX Assets


A federal judge approved the AT&T – Time Warner Merger, setting the stage for a frenzy of media consolidation. First up: a bidding war over 21st Century Fox.

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

Jun. 14 2018 — A U.S. district judge on June 12 approved AT&T Inc.'s acquisition of Time Warner Inc. with no restrictions, which should open up the media M&A floodgates in a world that is increasingly moving toward digital consumption of content. First up to bat: competitive bidding for most of 21st Century Fox Inc.

Comcast Corp., emboldened by the decision that the merger did not violate antitrust laws, offered on June 13 to purchase most of 21st Century Fox for $79.17 billion in cash, a 19.7% premium to Walt Disney Co.'s stock offer of $66.14 billion, worth $68.36 billion based on the close of Disney's stock June 13.

On a cash flow basis, the deal would be expensive, at 14.1x 2018 cash flow, although this drops to less than 10x when $2 billion in synergies are factored in.

Although the offer from Comcast is attractive, we think a competing offer that allowed shareholders to choose cash or stock may have been more attractive to some shareholders that have a low basis in their shares. Since this deal was widely expected to be announced, Disney has had plenty of time to consider whether it will bid higher, and if so, if it will do so with a mix of stock and cash. Should the board decide Comcast has the better deal, Disney would have five days to come up with a counter offer.

As the table below shows, the regional sports networks are the most expensive piece of the company, valued at an estimated $19.14 billion in the Comcast offer.

Disney-Fox deal: What will the Department of Justice think?

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Listen: Kagan MediaTalk - Episode 2: TV’s Summer Soccer Fever

The following post comes from Kagan, a research group within S&P Global Market Intelligence. To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

In this second episode of Kagan MediaTalk, senior research analysts Justin Nielson and Tony Lenoir discuss the upcoming FIFA World Cup, to be held in Russia June 14-July 15, and what soccer's biggest international stage means for the U.S. TV ecosystem.

In addition to being hosted on Soundcloud this podcast is also available on iTunes, Stitcher, and TuneIn.

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P).

Credit Analysis
50 Years Of Altman Z-score, And PD Model Fundamentals – Case Study General Motors

Jun. 11 2018 — The year 2018 marks the 50th anniversary of the Altman Z-score, which was designed to gauge credit strength of publicly traded manufacturing corporates. Until this day, the model has been used by financial practitioners to obtain a condensed picture of the financial strength of a company, and serves as a benchmark for credit risk assessment models.

As a part of providing data and tools for a comprehensive analysis of credit risk, S&P Global Market Intelligence has developed a family of PD Model Fundamentals (PDFN). The PDFN is a statistical model that produces probability of default (PD) values over a one- to more than thirty-year horizon for public and private banks and corporations of any size. The model maps the PD values to credit scores1 (i.e. ‘bbb’), based on historical observed default rates (ODRs) extracted from S&P Global Ratings’ database (available on CreditPro® ) PDFN also offers a global coverage of over 250 countries and more than 20 segments, regions, and industries.

PDFN incorporates both financial risk and business risk to generate the overall PD value. This innovative approach captures, in a statistical PD model, important credit risk drivers as identified by S&P Global Ratings’ extensive experience in corporate credit assessments, and provides users with a well-rounded measure of credit risk, where different sources can be easily identified.

We apply the credit assessment metrics to analyze one of the most publicized bankruptcy events in the last decade, the case of General Motors (General Motors Company, formerly General Motors Corporation). In Figure 1 we present the historical evolution of credit risk for General Motors (GM) from January 2005 to May 2018, accompanied by bankruptcy related Key Developments. We compare assessed credit score by PDFN, Altman Z-score, and corresponding S&P Global Ratings Issuer Credit Rating.

At the beginning of 2005, PDFN indicates a credit risk score of ‘bbb-‘, while the S&P Global Ratings Issuer Credit Rating is ‘BBB-‘. The credit risk score indicates that General Motors had adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments. Likewise, the Z-score indicates a rather problematic financial situation, placing General Motors in distressed zone category.

In the following months, the credit quality of General Motors rapidly deteriorated. PDFN signals highly increased probability of financial distress already at the beginning of 2007, more than two years in advance. The implied ‘ccc’ credit score suggests high vulnerability to adverse business, financial, or economic conditions with at least a one-in-two likelihood of default. A few months before default, PDFN indicates a credit score of ‘cc’, thus expecting default to be highly likely. Similarly, the S&P Global Ratings Issuer Credit Ratings shows decaying credit quality, albeit the credit rating changes are more sporadic and have larger increments. The Z-score starts to show a significant deterioration of credit quality one year prior to default, but with a notable lag in comparison with PDFN.

After completion of the post-bankruptcy reorganization, creditworthiness of General Motors improved, and PDFN indicates a fairly stable credit risk profile with an implied score of ‘bbb’. In comparison, S&P Global Ratings Issuer Credit Rating initially shows a greater conservatism in light of the reorganization processes. Since then, the credit rating has improved steadily, converging with PDFN estimate. Z-score shows a somewhat steady estimate of credit risk, with a slight deterioration in the recent years.

Figure 1: Historical evolution of credit risk for General Motors (GM)

The shaded area denotes the period of reorganization between the bankruptcy announcement and reemergence of General Motors (GM) as a public company on the New York Stock Exchange (NYSE). Dashed vertical lines denote bankruptcy related Key Development (see corresponding numbers for details). The Z-score scale has been selected to match the credit score level at the beginning of the period.

Source: S&P Global Market Intelligence (as of May 30th, 2018). For illustrative purposes only.

General Motors (GM) – Key Developments:
(1) Nov 8, 2008: GM heads towards bankruptcy
(2) Dec 31, 2008: GM expects to receive $13.40 billion in funding from U.S. Department of The Treasury.
(3) Feb 14, 2009: GM contemplates bankruptcy
(4) Jun 1, 2009: GM filed for bankruptcy
(5) Nov 17, 2010: GM has completed an IPO and starts trading on NYSE

PDFN incorporates both financial and business risk dimensions to generate an overall PD value as well as an assessment of each individual dimension (financial and business risk). It also comes equipped with a useful analytic tool, the contribution analysis, which allows users to identify drivers of risk, in absolute or relative terms, to define potential paths to creditworthiness improvement or deterioration.

Figure 2 presents the current credit risk profile of General Motors as provided by the PDFN based on last twelve months of data. The contribution analysis indicates that overall business risk is strong, but the company’s financial position is aggressive and is currently the main driver of overall PD estimate. A deep dive analysis shows a weak total equity position which in addition to profitability (EBIT/Total Assets) and efficiency (EBIT/Revenues), resulting in limited financial flexibility (Retained Earnings/Total Assets), represent the risk factors with the largest driver for the assigned credit risk score for General Motors.

Figure 2: Credit risk profile of General Motors (GM)

Source: S&P Global Market Intelligence (as of May 30th, 2018). For illustrative purposes only.

This case study exemplifies the value of PD Model Fundamentals, in providing predictive insights into companies’ creditworthiness and dynamic estimates of PD value and mapped credit score. Our model was trained and calibrated on default flags and is able to signal deterioration of credit quality well in advance of the actual bankruptcy event. The combination of both financial risk and business risk enables a comprehensive overview of a company's creditworthiness, while also providing an in-depth review of a company's credit risk profile to identify and distinguish the main sources of risk. S&P Global Market Intelligence leverages leading experience in developing PD models to achieve a high level of accuracy and a robust out-of-sample model performance. The integration of PDFN into the S&P Capital IQ platform allows users to access a global pre-scored database with more than 45,000 public companies and almost 700,000 private companies, obtain PD values for single or multiple companies, and perform a scenario analysis.

1 S&P Global Ratings does not participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the uppercase credit ratings issued by S&P Global Ratings.

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Credit Market Pulse March 2018 Issue

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Webinar Replay: Outlook On Credit Markets And The Implications For Systemic Risk

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Watch: Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

Steve Piper shares Power Forecast insights and a recap of recent events in the US power markets in Q4 of 2017. Watch our video for power generation trends and forecasts for utilities in 2018.