Rating action

Scope Ratings GmbH (Scope) has today assigned a long-term issuer and senior unsecured debt rating of AA to Österreichischer Rundfunk Stiftung öffentlichen Rechts (ORF). Scope has also assigned short-term issuer ratings at S-1+. All Outlooks are Stable. All ratings are expressed in both local and foreign currency.

Summary and Outlook

The ORF's AA rating reflects the following factors, which support its creditworthiness: i) the public-service mandate to provide broadcasting in Austria according to the ORF Act (ORF-G) and the strategic role to its public sponsor, ii) stable revenues through programme fees, iii) market leader position in Austria, and iv) conservative financial management with high equity and moderate levels of indebtedness.

However, the rating also takes into account several challenges: i) an evolving behaviour among users, especially regarding online and streaming activities, ii) deregistration of fee payers and declining advertising revenues, and iii) legal risks at the European level.

The Stable Outlook reflects our assessment that the risks to ORF are balanced over the next 12 to 18 months.

The ratings/Outlooks could be upgraded if: i) there were legislative changes leading to significantly stronger financial and/or operational linkages with the federal government; and/or ii) Scope observed significant and sustainable improvements in the business and/or financial risk profile.

The ratings/Outlooks could be downgraded if: i) the rating of the Republic of Austria were downgraded; and/or ii) there were unfavourable legal changes to the programme fees financing model; and/or iii) Scope observed a significant and sustained deterioration in the business and/or financial risk profile.

Rating rationale

The first rating driver is the ORF’s high level of integration with the Republic of Austria (AAA/Stable). Due to a high level of integration, Scope applies the top-down rating approach under its rating methodology for Government-related Entities. The starting point and rating anchor of this approach is the AAA rating of the federal government.

The activities of ORF as a public service broadcaster in Austria are of strong public interest. The purpose and activities of the ORF are regulated by federal law in the ORF-G and include the provision of broadcasting with TV and radio in Austria. The public-service nature of this mandate and legislative competence at the federal level have been anchored in the Austrian Federal Constitutional Law since 1974. To fulfil its public-service mandate, the ORF operates four nationwide TV programmes and 12 radio programmes. The public-service mandate also includes the operation of a teletext service and online services.

Integration with the federal government is also strengthened by the federal government’s high influence over the composition in the ORF’s highest governing body, the Foundation Council (“Stiftungsrat”). It acts as the governing and supervisory body and is similar to the supervisory board of a public limited company. Among other things, it sets the overall strategy, determines the level of programme fees and appoints the Director General, as well as directors and regional directors. Of the 35 members, 15 are appointed directly by the federal government. In addition, the federal government appoints the members of KommAustria, the supervisory authority over the ORF. KommAustria's competences include reviewing the admissibility of new offerings and programme fee increases, as well as financial control over the ORF.

A second driver for the ORF’s AA-ratings is the financing model via programme fees. These make up over 60% of annual revenues and ensure that the ORF is sufficiently financially equipped to fulfil its public-service mandate. The level of the programme fee is set by the “Stiftungsrat” every five years at the latest and is based on the projected net costs of fulfilling the public-service mandate over a five-year financing period. The programme fee for television reception facilities including radio (combi) was last increased in February 2022 by 8%, or on average 1.38 euros, and amounts to 18.59 euros per month on average for the current financing period until 2026. Another development is the decision of the Constitutional Court of Austria that reception of ORF programmes exclusively via the internet without paying fees is unconstitutional. Thus, the recovery of users who receive ORF programmes only via the internet would be moderately positive and lead to additional revenues. The amount depends on the design of the new regulation. The legislator has until 2023 to implement the change.

Another rating driver is the ORF’s high strategic relevance.

The ORF and its programmes enjoy a high level of coverage and trust in Austria. Approximately 87% of Austrians (14+) use ORF programmes at least once per week, and surveys confirm that Austrians trust ORF the most among all Austrian media. In the crisis years since 2020, ORF has been able to expand its market share, and broadcasts on the ongoing crises (Corona pandemic, war in Ukraine) were highly-viewed. The ORF also fulfils the purpose of representing regional interests for the federal states through regional studios that operate their own radio channels and contribute to nationwide programmes.

The ORF fulfils a unique role in the TV and radio market in Austria. The ORF does not operate on a profit-maximising basis and competes with private and other German-language public broadcasters such as ARD/ZDF. Specifications of § 4 ORF-G ensure that the ORF’s programmes distinguish themselves from purely commercial ones, e.g. by providing cultural content and comprehensive informational services for the general public on all important political, social, economic, cultural and sporting issues.

Market leadership, high levels of trust, national representation for federal states, and established production and distribution structures make substitutability of the ORF very difficult, and the continued existence and sufficient financial means of the ORF are thus of high public interest. Scope deems the willingness to provide direct financial assistance in exceptional circumstances as ‘medium’, and, similarly, assesses a hypothetical default as having negative reputational consequences for the federal government which in turn increases the likelihood of support if ever needed, supporting the AA-rating.

Finally, the AA-ratings take into account overall neutral business and financial risks under the ORF's stand-alone profile, which thus do not further change the AA rating derived under the top-down approach.

The ORF's business profile benefits from its dominant position as market leader in TV and radio broadcasting, a high reputation and adequate profitability and earnings, which are secured by the programme fees financing model. Moderate risks exist due to a decline in fee payers, especially in times of high inflation rates and due to restrictions of subscriber recruitment by Covid-19, and declining advertisement revenues. In addition, dynamically changing usage of media, especially among younger viewers, leads to a decreasing relevance of linear TV and radio channels. Finally, there are risks in connection with proceedings before the European Court of Justice on the legality of levying value-added tax on programme fees. A decision by the European Court of Justice to abolish value-added taxes on the ORF’s programme fees would have a significant impact on the ORF's costs.

Scope considers the risks to the ORF's financial profile as low. The ORF has a high equity ratio of over 20% and its conservative financial management results in moderate debt levels with long maturities, fixed-rate coupons and no foreign-currency risks. Furthermore, the ORF has comfortable liquidity buffers and benefits from predictable operating cash flow through income from programme fees. At the same time, Scope sees moderate risks in the investment portfolio, which is subject to valuation changes.

Qualitative Scorecards (QS1 and QS2)

Scope applies a ‘Top-Down’ approach (QS1) in assessing the creditworthiness of the ORF, which takes the public sponsor’s rating (Republic of Austria: AAA/Stable) as the starting point and then adjusts it negatively, based on the assessment of i) Control and regular support; and ii) Likelihood of exceptional support (QS2). The analysis also includes a supplementary analysis of the entity’s business and financial risk profiles.

The adoption of the top-down approach (QS1) reflects a strong level of integration between the ORF and its public sponsor resulting from: i) a ‘High’ integration assessment for Legal status, ii) a ‘Medium’ integration assessment regarding the ORF’s Purpose & activities; and iii) a ‘High’ integration assessment on Financial interdependencies. Given the independent special ownership structure, Scope does not assess Shareholder structure in line with its methodology.

Scope assesses Control and regular support for the ORF as ‘Medium’ (QS2) as a result of: i) ‘Medium’ government control over Strategic and operational decision making; ii) ‘High’ control over its Key personnel, governing & oversight bodies; and iii) ‘Medium’ Ordinary financial support.

Scope assesses the Likelihood of exceptional support at ‘Medium’ (QS2), reflecting: i) a ‘Medium’ assessment for Strategic importance for the public sponsor; ii) ‘Medium’ Substitution difficulty; and iii) ‘Medium’ assessment on the political and reputational Default implications in the event of a hypothetical default.

The assessments under QS1 and QS2 result in an indicative rating of AA for the ORF. A supplementary analysis of standalone business and financial risks does not lead to any adjustment of the indicative AA rating.

Factoring in of Environmental, Social and Governance (ESG) Factors

Scope considers the following ESG factors in the rating analysis.

First, Scope's AAA rating for the Republic of Austria, the ORF’s public sponsor, includes an appraisal of ESG factors, which are weighted at 20% overall per Scope's ‘Sovereign Ratings’ methodology.

Governance factors are relevant to ORF's rating and are included in the assessment of integration with the Federal Government of Austria and in the assessment of the ORF’s stand-alone profile. These factors are supported by the high quality of management and governance structures, and sound and conservative liquidity and financial management.

Social factors are included in the assessment of ORF's strategic relevance. Since the ORF, as a public service broadcaster in Austria, emphasises content on the promotion of democracy, European identity, information, culture and sport, equal rights and equality, in comparison to purely commercial programmes by competitors, Scope assesses social aspects as relevant and positive for ORF’s ratings.

In the rating process, Scope also analyses the ORF's environmental management, which did not play a direct role in this rating action, however. In its broadcasting programme, a special programme called MOTHER EARTH offers content on the topic of sustainability and thus raises awareness among users. The ORF's own sustainability programme includes sustainability goals, such as climate neutrality by 2040 and a commitment to reduce greenhouse gas emissions by at least 50% compared to 2005-levels. The ORF site at Küniglberg was renovated or newly built according to high energy efficiency standards.

Rating committee
The main points discussed by the rating committee were: i) integration with the public sponsor, ii) control and regular support assessments, iii) likelihood of exceptional support, and iv) stand-alone factors under the supplementary analysis and business and financial risk profiles.

Methodology
The methodology used for these Credit Ratings and/or Outlooks, ‘Rating Methodology – Government Related Entities’, published on 6 May 2022 is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Rating and/or Outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Julian Zimmermann, Senior Analyst
Person responsible for approval of the Credit Ratings: Dr. Giacomo Barisone, Managing Director
The public Credit Ratings/Outlooks were first released by Scope Ratings on 9 September 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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