Many companies in the media industry depend on advertising as their primary revenue source and advertising spending is highly correlated with changes in economic conditions. While it's far too early to assess how the global coronavirus pandemic will affect overall consumer confidence and spending worldwide, advertisers have already begun to pull back on marketing plans in response to the upheaval. And, though ad-based companies may not be subject to repercussions yet, S&P Global Ratings believes they'll eventually feel the pain.

Here we detail which sectors and companies within the global media and entertainment industry are vulnerable to the fallout from the pandemic. The industry comprises many distinctive sectors, including a number of consumer-facing segments that depend on customers' ability and willingness to leave their homes. Specifically, these include travel-related companies, live events (e.g., ticketing, concerts, exhibitors, and sporting events), theatrical events (e.g., film studios and theater operators), and theme parks. We've taken more than 25 ratings actions the past few weeks on companies in these sectors, and we believe there will be more coronavirus-related downgrades, negative outlook revisions, and ratings put on CreditWatch with negative implications.

Advertising Pullback Is Coming

Advertising revenue is the lifeblood of much of the media industry and is vulnerable to economic volatility and, specifically, consumer spending. S&P Global's economists currently forecast that a recession would be limited to the first half of 2020, with a U-shaped rebound in the second half of the year. While we've only seen anecdotal evidence of an advertising slowdown (e.g., The New York Times' warned that it expects its total advertising revenue to decline by the mid-teens-percent area in the first quarter of 2020 because its digital advertising decreased by 10%), we fully expect the media industry will experience a significant slowdown in advertising spending. However, it's important to note that this won't affect the media industry uniformly. Each media sector features distinct advertising characteristics, which would determine how vulnerable they are to a drop in spending. For example, sectors with short lead times for ad placement will experience the effects of declining ad revenue more quickly than other segments. This includes digital banner and search advertising, where a pullback in demand would disproportionately affect digital publishers and magazine and newspaper companies. In addition, we would expect the pullback to have a near-term effect on radio advertising and because movie theaters are closed, the theater advertising companies (e.g., National CineMedia Inc. and Screenvision LLC)).

The effects of the slowdown on television advertising will also vary. Local television advertising, which has a much shorter cancellation window, and draws from local advertisers (e.g., restaurants, auto dealers, etc.), is likely to experience significant declines in the span of a few weeks. National television (the four broadcast networks and cable networks) will see a more delayed impact. First, pricing in the television scatter market, which features shorter lead times, could begin to weaken soon. Over the longer term, national television advertising may actually suffer less of a decline than other media because advertisers may place greater value on keeping their brands in front of consumers during a relatively short (two-quarters) recession. If, however, the downturn continues longer than two quarters, this behavior may change and national advertising may suffer. How postponed or cancelled sports programming affects television advertising isn't clear especially now that the Tokyo Summer Olympics are postponed from July/August 2020 to sometime in 2021. Counterintuitively, television advertisers may see some benefit if consumers watch more television due to their increased time spent at home, which would boost audience ratings and help advertisers achieve their audience guarantees. However, this boost would likely be insufficient to make up for any pullback in advertising spending.

We would expect the effect of the pullback on advertising agencies to be highly correlated with the overall advertising market because these companies participate in all aspects of the advertising supply chain (i.e., digital, national, local, events, and public relations). A pronounced and protracted slowdown that extends into the fourth quarter would have a more material effect on ad agencies because the fourth quarter is their busiest quarter by revenue and earnings. However, the ad agencies have flexibility to right-size their workforce to respond to a deeper decline in advertising spending because of their largely variable cost structures (employees account for 65%-70% of costs, which the companies can quickly adjust).

Travel-Related Companies Are Feeling The Pain

Just in the past few weeks, demand for airline travel and hotels in the U.S. has ceased. International travel has come to a screeching stop and domestic travel has been severely curtailed. Hotels have closed and some, including Marriot, have begun furloughing employees. Online travel agencies (OTAs), corporate travel companies, and global distribution systems (GDS) companies are particularly vulnerable. Very early on in the coronavirus outbreak, the OTAs began experiencing steep declines in revenues from both the overall plummet in travel volume and falling pricing for air tickets and hotel stays. While cancellation fees can help cushion the near-term impact, declining travel volumes and the loss of top-tier GDS incentives due to the inability to deliver sufficient volumes will have significantly hurt company earnings. GDS companies also lose their relative immunity to changing ticket prices when ticket sales decline.

The length and depth of the coronavirus' impact on the long-term health of the global travel sector is currently unknown but it's clear that it will suffer significant harm. Travel companies can temper some of the damage due to their largely variable cost structures, which allows them to more quickly adjust to declining demand. However, sizable ongoing technology and transformation efforts at certain companies could exacerbate 2020 losses, such as with Sabre Corp. (which we downgraded to 'BB-' with a negative outlook on March 10, 2020). Our near- and medium-term outlook for the travel sector is negative because it's likely that the economic fallout from the coronavirus will extend well beyond the end of the pandemic. We think it will likely take three to six months for normal travel patterns to resume following that end point.

Live Events And Secondary Ticketing Are Suffering

Countries throughout the world have imposed restrictions in hopes of slowing the growth of coronavirus cases, including banning public gatherings and postponing or cancelling all live events, including sports, concerts, and plays. This has immediately hurt those rated companies that deal with live events. Companies in this sector that we've taken recent ratings actions on include Live Nation Entertainment Inc., which is the largest global events company, staging more than 40,000 events in 2019. In addition, we've have taken ratings actions on secondary ticketing resale platforms, like Pugnacious Endeavors Inc. (doing business as [d/b/a] Stubhub Inc.) and Hoya Midco LLC (d/b/a Vivid Seats Ltd.), both of which are heavily exposed to all types of live events (e.g., sports, concerts, and theater).

Sports

We've already seen the cancellation or postponement of most sporting events globally, most notably the Tokyo Summer Olympics which were moved from July/August 2020 to sometime in 2021. We'veplaced a number of sports-related companies we rate, like UFC Holdings LLC and NEP/NCP Holdco Inc. (NEP), on CreditWatch with negative implications. In addition, we also lowered NEP's issuer credit ratings to 'B-', reflecting the material impact the cancellations have had on the company's operating performance. We believe many of the sports leagues are better protected from the crisis if they postpone events because it leaves open the possibility that the event occurs and the broadcast network pays the rights fees. While each contract is unique, we believe that, in general, the broadcast networks are only contractually required to pay for events they broadcast and not for cancelled events.

Theme Parks

Both The Walt Disney Co. and Comcast Corp. , through its NBCUniversal (NBCU) business, have been affected by the coronavirus because they've been forced to close all their theme parks globally. Disney temporarily closed its two U.S. flagship parks in Orlando, Fla. and Anaheim, Calif. and its Paris park on March 13..Previously, in late January, Disney closed its two parks in Asia--Disney Shanghai and Disney Hong Kong (it recently resumed operations partially at Disney Shanghai as a first step in a phased reopening). Disney Tokyo (Disney doesn't own this park but receives a licensing fee from the operator) closed at the end of February. The theme parks represent a material portion of Disney's revenues and cash flow (about 30% of consolidated revenues), and thus Disney's operating and financial metrics would weaken materially if these closures extend for some time. This, along with diminished advertising revenue, could reduce the company's pace of deleveraging and prevent it from meeting our 2.5x leverage target by the end of fiscal year 2021.

Similarly to Disney, Comcast closed its two U.S. parks in Orlando, Fla. and Hollywood, Calif. on March 15 (its Osaka park closed before then). The effect on Comcast's credit measures, however, will likely be far less significant than on Disney given the size and stability of the company's core domestic cable business, which represents over 60% of consolidated revenues (theme parks presents just about 5%). Despite our expectation for material declines in revenues, earnings, and cash flow at NBCU, which could temporarily push Comcast's leverage above our 3x downside threshold for the rating, we expect the company's steady cable operations to continue to support the 'A-' issuer credit rating. Longer-term, a more severe decline in advertising, filmed entertainment, and theme park revenue in a stressed scenario could hurt the company's credit measures more profoundly although this isn't currently incorporated into our base case forecast.

Film Studio Release Dates May Be At Risk

The coronavirus pandemic has already hurt the global film industry. Most countries have closed theaters to stem the spread of the virus. On Sunday, March 22, Australia finally shut down all cinemas and, at the same time, China reopened 507 movie theaters. Year to date, through March 23, the U.S. box office is down 15% from 2019 and down from 2018. China's box office--the second largest in the world--which has been closed since late January has seen an 87% decline in gross box office receipts year to date, declining to just $306 million from $2.4 billion for the same period last year.

In response to the pandemic, the global film studios have delayed releases to later this year or even next. This is likely to result in a reshuffling of the release schedule for films slated for later this year to either relieve overcrowding of the release windows or because film completion has been delayed by studio shutdowns. These delays present working capital challenges, particularly for smaller studios, because delaying the release increases the gap between when they incur production costs and when they generate box office cash receipts, which may stress balance sheets. For example, Metro-Goldwyn-Mayer Inc. delayed (for the second time) the release of its the latest James Bond film, "A Time To Die," to Nov. 25, 2020, from its previous April 2020 domestic release date. This decision exposes MGM to two significant costs, the production costs (as the film is estimated to have cost $250 million to make) and any early marketing spending, which it will now have to absorb.

Table 1

Film Exhibitors

Film exhibitors have already felt immediate pain from the virus as theaters across the U.S. have been closed since mid-March. As a result, we've placed our ratings on all theater operators globally on CreditWatch with negative implications. This includes AMC Entertainment Holdings Inc. and Cinemark Holdings Inc. in the U.S., and Cineworld Group PLC in Europe. While they pay the studios a share of their revenue, and concessions involve a significant variable-cost component, the movie theater operators still have large fixed charges, such as lease expenses, capital expenditures (capex), and interest. AMC Entertainment has already reduced its capex and is highly leveraged at roughly 6x, which leaves the company with fewer levers to pull to respond to a severe decline at the box office. Cinemark’s leverage is much lower at 3x and it devotes a larger proportion of its capital spending to growth, which it could pull back to offset a decline in its operating cash flow.

Timing Of The Credit Impact

The speed at which the Coronavirus has affected the global economy, especially the U.S., is astonishing. The rate at which we will take rating actions on the companies we cover in the global media and entertainment sector will depend on how quickly the coronavirus spreads globally and how severally it affects these companies. While most every company that we rate will be affected, some may be able to weather this pandemic with ratings intact if the recovery occurs as expected in the second half of the year. We've already begun taking ratings actions on the most vulnerable companies, which are listed in table 2. Besides companies in the travel and exhibitor segments, we will also closely watch companies with near-term maturities, weak liquidity, or limited covenant headroom. We may need to downgrade many of these companies before the virus is contained. We may also find it necessary to initiate ratings actions on companies with negative outlooks and those with stable outlooks that are operating at the high end of their ratings thresholds. Given the volatility this pandemic has generated, and the pace of company announcements, ratings on more vulnerable companies (especially in the speculative grade category) could be subject to multiple ratings actions.

Table 2