U.S. Media & Entertainment Industry Rebooting The U.S. Media Sector In A Post Pandemic World January 2020 Media & Entertainment Group: Naveen Sarma, Senior Director Jawad Hussain, CFA, Director Vishal Merani, CFA, Director Rose Oberman, CFA, Director Samantha Stone, Director U.S. Economics | Recession Takes Hold End of the cycle. The COVID-19 pandemic has brought the longest economic expansion in U.S. history to an abrupt end. In our baseline, we forecast GDP will drop by 3.9% in 2020, down from our pre-virus December forecast of a 1.9% gain and our June forecast of a 5.0% drop.. Short and sharp. The COVID-19 recession was on par with the economic losses seen during the Great Recession, but over a much shorter time frame. In our deep recession scenario, downturn reemerges in the fourth quarter as COVID-19 case flare up and the bridge the government began building with stimulus only made it halfway to the other side. Policy response. As this sluggish recovery unfolds, three risks remain: no coronavirus vaccine yet available as U.S. heads into flu season, no new fiscal stimulus, and trade tensions with China on the rise. 2 Corporates | Diverging Paths to Recovery – Higher leverage incurred during the pandemic will lead to a slow recovery of credit metrics in many sectors. – Low interest rates and the long road to recovery puts financial policy as a key factor and variable that could further shape and delay the recovery timeline. 3 North America | Downgrade Potential By Sector Current Negative Bias (Oct. 31, 2020) 5-YearAverages Oil &Gas (59) Automotive(32) 64% 38% Media/entert(159) 60% 20% Retail(59) 59% Capital goods (71) 24% 51% Aerospace/defense(24) 31% – Echoing the global trends, North American sectors including oil and gas, Transportation(31) 51% auto, media, and lodging face the highest downgrade risk in the present 23% time. Consumer products(112) 48% 20% CP&ES(51) 48% These sectors haveseen: Metals/mining/steel(26) 16% Forest(28) 45% – Volatile market conditions affectingtheir business conditions (auto, oil 26% and gas, lodging, as well asretail). Financial institutions (56) 44% Health care(50) 20% – Structural dislocation in the autosector before the pandemic. 39% Telecommunications(17) 22% – Effects of travel bans and social distancing measures on the business Utilities(40) 37% 12% prospects of issuers in leisure, tourism and travelsectors. Home/RE(22) 36% High technology(32) 21% 32% Insurance(22) 18% 21%25% 24% 16% 17% 10% 13%17% 17% 9% 0% 20% 40% 60% 80% Data as of Oct. 31, 2020 and include sectors with more than five issuers only; excludes Sovereign. Source: S&P Global Ratings. 4 U.S. Media & Entertainment | COVID-19 Related Rating Actions Pre-COVID as of Feb 1, 2020 Current view as of November 25, 2020 Source: S&P Global Ratings U.S. has taken over 100 COVID-19 related ratings actions since February – 15% of ratings now ‘CCC+’ or below (compared to 8% pre-pandemic) – Three investment grade ratings actions – Expedia (BBB-/Negative/--) and Walt Disney (BBB+/Neg/A-2 (twice) – COVID-19 related defaults – AMC Entertainment and Cineworld – 47% of ratings have negative outlooks or CW Neg (20% prior to crisis), signaling further downside risk 5 U.S. Media & Entertainment | Key 2021 Industry Themes & Concerns Issue What’s The Big Deal? Sectors / Companies Affected Uncertainty as to whether national television remains the premium medium Advertising trends and recalibration • Transit Recovery of lagging sectors, especially transit of secular trends • Local (TV, outdoor, radio) How do local markets perform – recovery or set back? • Broadcast networks Is it better win but overpay OR lose but salvage financial metrics? 2021/2022 credit metrics • TV station operators Winners will likely face weaker credit metrics due to depressed EBITDA and cash flow Renewal of NFL broadcast contract • AT&T What does this do to relationship between broadcast networks and TV station operators? – Already elevated credit metrics • Digital platforms as many companies issued debt S&P targeting return to normalcy in 2H21 though gov’t imposed restrictions may delay recovery to shore up liquidity during crisis Pace of recovery for out of home • Theme parks, live events, Uncertain how consumers will behave (roaring twenties or bunker mentality?) sectors concerts, theaters – Streaming initiatives will depress Reaction will determine fate of those companies with elevated leverage margins and cash flows until Shrinking theatrical window • Film studios platforms gain scale and reach Film windowing Day and date strategy • Exhibitors cash flow breakeven Rebuilding fractured relationship between film studios and exhibitors – Streaming strategies in full display with launches by all major media companies (finally) Will the recovery come in time for Pivot to a streaming world Differentiation in performance (ie, subscriber growth) of various streaming services • Media companies low rated (B/CCC) companies? How long before we pick winners & losers? Was improved pace in 2020 an anomaly or is video penetration finding a new floor ? Pace of cord cutting • Television Impact on television compounded by declining audience ratings Social media platforms under fire from regulators, legislators, & courts Regulation of social media Potential reform of section 230 of the1996 Communications Decency Act • Social platforms Antitrust lawsuits against Facebook and Google Pay-TV distributors versus out of favor linear networks • Television Distribution versus content New powers in distribution (Roku, Amazon, Apple) • Diamond Sports Consolidation to achieve scale – scale is increasingly key differentiator M&A Rationalizing noncore assets within existing portfolios and adding new capabilities and assets • All of media Aided by availability of low cost financing and excess cash on the balance sheet 6 U.S. Media & Entertainment | Near-Term Recovery From Pandemic • Advertising-based media – Current state: TV better than expected, radio in line, and outdoor weaker due to transit – Near term advertising trending positive (negative yr/yr but sequentially improving) for all media except transit o Return of sports, especially NFL o Scatter market pricing has returned to pre-COVID levels o 2020/2021 TV upfront nearly completed with prices up and volumes down o Record political advertising in 3Q and 4Q masks underlying performance of local TV o Solid growth in digital advertising – April was only declining month • Out of home entertainment – Current state: Movie theaters, theme parks, & some sports events have re-opened but with limited attendance, live events (concerts, theater, conferences) still closed – Uncertain return path to normalcy: o Timing will vary depending on type of business and geographic location o Lifting of gov’t mandated social distancing measures could help pace of recovery but lingering consumer fears will ultimately affect return to normalcy o Broad global second wave or local / regional virus flair ups could result in volatility o S&P assumes vaccine will be widely available by middle of 2021 7 U.S. Media & Entertainment | Under Pressure From COVID-19 And Recession Media Subsectors Ratings impact Long Term Revenue EBITDA Credit Impact If No Impact to Decline - - Decline - - Revenue Metrics Vaccine In Business 2021 versus 2021 versus Recovery To Recover to COVID- 19 Recession 2021 Profile 2019 2019 2019 Levels 2019 Levels Data/professional publishers Low Low Low Neutral >=2019 >=2019 Little impact Little impact Video gaming Low Low Low Positive >=2019 >=2019 Little impact Little impact Music publishing Low Low Low Neutral >=2019 >=2019 Little impact Little impact Streaming service providers Low Low Moderate Positive >=2019 >=2019 Little impact Little impact Local TV stations Low Moderate Moderate Neutral 0% to 10% 0% to 10% 1H21 Little impact Moderately Broadcast networks Moderate/Low Moderate Moderate 0% to 10% 0% to 10% 2021 2021 Negative Cable TV networks Moderate/Low Moderate Moderate Negative 10% to 20% 10% to 20% 2021 2021 Moderately Radio stations Low High Low 10% to 20% 10% to 20% Never 2022 Negative E- commerce services (non travel) Moderate/Low Moderate/Low Low Neutral >=2019 >=2019 2021 2021 Ad- supported online content Moderate/Low Moderate/Low Moderate/Low Positive >=2019 >=2019 Little impact Little impact platforms Ad agencies and marketing services Moderate/Low Moderate Moderate Neutral 0% to 10% 0% to 10% 2H21 2021 companies Printing Moderate Moderate/Low Moderate Neutral 10% to 20% 10% to 20% Never 2022+ Educational publishing Moderate/High Moderate Moderate Neutral 10% to 20% 10% to 20% Never Never Magazines & Newspapers Moderate/Low High Moderate/Low Neutral 20% to 30% 30% to 40% Never 2022 Outdoor Moderate/High Moderate/High Moderate Neutral 20% to 30% >=50% 2023 2023 Film and TV programming production Moderate/High Moderate/Low High Neutral 10% to 20% 10% to 20% 2022 2022 Trade shows and conferences High Moderate/High High Neutral >=50% >=50% 2023 2023 Motion picture exhibitors High Low High Negative >=50% >=75% 2022 2022 E- commerce services (travel) High Moderate High Neutral >=50% >=90% 2023 2022+ Live events High Moderate High Neutral >=40% >=40% 2022 2023 Theme parks High High High Neutral >=50% >=90% 2022+ 2023 8 U.S. Media & Entertainment | Revenue Exposure To COVID-19 (2019 Mix) Affiliate Advertising Merchandise SVOD Other Theme Content Cable / Company Theatrical licensing and Publishing SMB Total Total parks licensing Total Telecom Total retail AMC Networks 66% 32% 0% 0% 0% 0% 0% 1% 0% 0% 0% AT&T 7% 4% 0% 4% 3% 0% 0% 0% 79% 0% 2% Charter 0% 3% 0% 0% 0% 0% 0% 0% 88% 8% 0% Comcast 8% 13% 5% 8% 1% 0% 0% 0% 56% 7% 1% Discovery 43% 54% 0% 0% 0% 0% 0% 0% 0% 0% 2% Fox Corp 48% 43% 0% 0% 0% 0% 0% 0% 0% 0% 9% Lions Gate 35% 0% 0% 24% 38% 0% 0% 1% 0% 0% 2% Netflix 0% 0% 0% 0% 0% 0% 0% 99% 0% 0% 1% ViacomCBS 31% 40% 0% 23% 2% 0% 3% 0% 0% 0% 1% Walt Disney 23% 15% 29% 11% 7% 6% 0% 3% 0% 0% 5% Content licensing includes TV/SVOD licensing and home entertainment Comcast SMB exposure includes all of business services Last annual reports for all companies Disney of September 28, 2019.