OREANDA-NEWS. Fitch Ratings says that Bertelsmann SE & Co. KGaA's (Bertelsmann) 2014 results revealed a significant increase in leverage as a result of acquisitions and restructuring costs, leaving the company with limited rating headroom. However, Fitch recognises that the company is going through a period of transformation and expects funds from operations (FFO)-adjusted net leverage to fall back below 2.0x, a key threshold for Bertelsmann's 'BBB+' (Stable) rating, in 2016.

The company today announced the planned issue of a hybrid bond. This could have a positive credit impact, depending on the size of the bond and on whether it qualifies for a 50% equity credit under Fitch's methodology, Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis. Fitch will assess the treatment of the hybrid as the details of the transaction are revealed.

The company's FFO-adjusted net leverage increased to 2.5x in 2014 from 1.9x in 2013 - this includes profit participation certificates but excludes non-recurring cash items as estimated by Fitch. Bertelsmann's net debt (excluding lease adjustments and pensions) increased by EUR1bn to EUR2.1bn at end-2014 due to the acquisition of e-learning business Relias as well as the buyout of a 25% minority stake at its magazines division Gruner+Jahr.

The company's underlying operating cash flow has remained stable, while free cash flow (FCF) of EUR140m (EUR380m in 2013) was impacted by restructuring costs and negative working capital changes. Fitch expects low single-digit percentage growth in EBITDA in 2015 and 2016 as a result of acquisitions and efficiency gains, along with lower restructuring costs, to support increase in FCF.

Bertelsmann benefits from strong cashflow generation, mainly from European broadcaster RTL. It is in the process of diversifying its business portfolio to offset declines in traditional media, which have been under pressure due to digitalisation. It maintains a modest dividend policy, which should allow the company to deleverage in the next two years.