Announcements

    Drinks

      Scope downgrades ORF’s credit rating to AA- and changes the Outlook to Stable
      FRIDAY, 10/05/2024 - Scope Ratings GmbH
      Download PDF

      Scope downgrades ORF’s credit rating to AA- and changes the Outlook to Stable

      The downgrade is driven by the downgrade of the Republic of Austria’s ratings to AA+. ORF’s ratings are closely linked to Austria’s through ORF’s government-related entity status and close strategic, operational, and financial ties.

      Rating action

      Scope Ratings GmbH (Scope) has today downgraded the long-term issuer and senior unsecured debt ratings of Österreichischer Rundfunk Stiftung öffentlichen Rechts (ORF) to AA- from AA in local and foreign currency and revised the Outlooks to Stable from Negative. The short-term issuer ratings have been affirmed at S-1+ in both local and foreign currency, with Stable Outlooks.

      The downgrade of ORF’s ratings to AA- is a result of a downgrade of Austria’s sovereign ratings to AA+, from AAA, on 26 April 2024.1 This decision is driven by ORF’s high integration with the Republic of Austria (AA+/Stable), given close strategic, operational and financial ties. Scope applies the top-down rating approach in assessing ORF as a Government-related Entity, with the starting point being Austria’s rating of AA+.

      Scope’s assessment of ORF’s level of integration with the Republic of Austria, which informs the degree of notching via-a-vis the sovereign rating, and of ORF’s stand-alone fundamentals under the supplementary analysis remain unchanged.

      Key rating drivers

      Integration with the federal government. The activities of ORF as a public service broadcaster in Austria are of strong public interest. The purpose and activities of 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, 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.

      Scope expects that ORF's activities will expand significantly into the online segment under the provisions of the amended ORF-G. However, the traditional TV and radio offering will remain a focus, with the exception of the sports channel, which can be distributed online from 2027.

      Integration with the federal government is also strengthened by the federal government’s high influence over the composition of 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 the ORF levy, 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 ORF. KommAustria's competences include reviewing the admissibility of new offerings and changes to ORF-levies, as well as financial control over ORF.

      A ruling of the constitutional court ‘Verfassungsgerichtshof’ (or VfGH) from 5 October 2023, found certain provisions of the ORF-G regarding the Foundation Council and the Audience Council to be in part unconstitutional. These provisions mainly involve the significant influence of the federal government in appointing members to these councils. Consequently, the government is required to revise the ORF-G by end of March 2025.

      Stable financing model via ORF-levies since 2024. A second driver for ORF’s AA- ratings and a strong link to Austria’s ratings is the financing model via ORF-levies from 2024. These make up the majority of annual revenues and ensure that ORF is sufficiently financially equipped to fulfil its public-service mandate. Scope assesses the change in financing via ORF-levies from 2024 as largely neutral for ORF, despite a lowered amount of EUR 15.30, from EUR 18.59. This reduction is broadly revenue-neutral due to an enlarged group of households and businesses that have to pay the levy. At the same time, ORF faces some risks for revenue collection due to the reliance on estimates in setting the updated levy in 2023. Expected cost savings until 2026 to which ORF has committed itself to should also ensure financial sustainability. The financing model via ORF-levies will help stabilise revenues in the long term, as this eliminates previous risks that arose due to the deregistration of users and the associated loss of revenues. Another important aspect of the new ORF-levy is that it will not include value added tax (VAT), in contrast to the current programme fee. This means that ORF can no longer offset payable VAT with VAT collected on programme fees. However, the amended ORF-G contains provisions that ensure that ORF is compensated for this financial loss, subject to the fulfilment of certain conditions.

      High strategic relevance. Another rating driver supporting the AA- rating and ORF’s strong link to the Austrian sovereign is ORF’s high strategic relevance.

      ORF and its programmes enjoy a high level of coverage and trust in Austria. Approximately 95% of Austrians (16+) use ORF programmes at least occasionally, 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, inflation and energy shocks) were highly demanded. 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.

      ORF fulfils a unique role in the TV and radio market in Austria. It 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 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 ORF very difficult, and the continued existence and sufficient financial means of 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 rating at AA-.

      Low-risk business and financial risk profiles. Finally, the ratings at AA- take into account Scope’s assessment of the ORF’s business and financial risk profiles. Scope’s neutral assessment of the business and financial risk profiles are unchanged vis-à-vis the previous review and do not further change the rating derived under the top-down approach.

      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 ORF-levy. Moderate risks exist due to revenue underperformance due to i) lower-than-budgeted ORF-levies and ii) 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, cost increases and the associated cost saving strategy of ORF are challenges.

      Scope considers the risks to ORF's financial profile as low. ORF has a high equity ratio of around 20% and its conservative financial management results in moderate debt levels with long maturities, fixed-rate coupons and no foreign-currency risks. The ORF’s debt, EUR 180m issued in 2015/16, was taken on to partially fund the development at its site at Küniglberg. Furthermore, ORF has comfortable liquidity buffers and benefits from predictable operating cash flow through income from the ORF levy. At the same time, Scope sees moderate risks in the investment portfolio, which ORF maintains to cover pension provisions, which is subject to valuation changes.

      Outlook and rating sensitivities

      The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the coming 12 to 18 months.

      Upside scenarios for the ratings and Outlooks are (individually or collectively):

      1. The Republic of Austria’s ratings and/or Outlooks were upgraded.
         
      2. There were legislative changes leading to significantly stronger financial and/or operational linkages with the federal government.
         
      3. Scope observed significant and sustainable improvements in the business and/or financial risk profile.

      Downside scenarios for the rating and Outlooks are (individually or collectively):

      1. The Republic of Austria’s ratings/Outlooks were downgraded.
         
      2. There were unfavourable legal changes to ORF’s financing model.
         
      3. Scope observed a significant and sustained deterioration in the business and/or financial risk profile.

      Qualitative Scorecards (QS1, QS2)

      Scope applies a ‘Top-Down’ approach (QS1) in assessing the creditworthiness of ORF, which takes the public sponsor’s rating (Republic of Austria: AA+/Stable) as the starting point and then adjusts it downwards, 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 ORF and its public sponsor resulting from: i) a ‘High’ integration assessment for Legal status, ii) a ‘Medium’ integration assessment regarding 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 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 ORF. A supplementary analysis of standalone business and financial risks does not lead to any adjustment of the indicative AA- rating.

      The results were discussed and confirmed by a rating committee.

      Environment, social and governance (ESG) factors

      Scope considers the following ESG factors in the rating analysis.

      First, Scope's AA+ rating for the Republic of Austria, ORF’s public sponsor, includes an appraisal of ESG factors 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 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 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 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. 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. ORF site at Küniglberg was renovated or newly built according to high energy efficiency standards. In its annual sustainability reports, ORF comprehensively reports on sustainability indicators. Finally, ORF’s recently updated asset management of provisions held for pension liabilities includes a comprehensive ESG strategy to monitor and minimise the CO2 emissions of the invested portfolio.

      Rating committee
      The main points discussed during the rating committee were: i) the rating change of Austria; ii) the reform to the ORF Act; iii) integration with the public sponsor, iv) control and regular support assessments, v) likelihood of exceptional support, and vi) factors under the supplementary analysis and business and financial risk profiles.

      Rating driver references
      1. Scope downgrades Austria to AA+ and revises Outlook to Stable

      Methodology
      The methodology used for these Credit Ratings and/or Outlooks, (Government Related Entities Rating Methodology, 13 July 2023), 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 and/or Outlooks were not amended before being issued.

      Regulatory disclosures
      These Credit Ratings and/or Outlooks are 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, Associate Director
      Person responsible for approval of the Credit Ratings: Jakob Suwalski, Senior Director
      The Credit Ratings/Outlooks were first released by Scope Ratings on 9 September 2022. The Ratings/Outlooks were last updated on 24 July 2023.

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

      Conditions of use / exclusion of liability
      © 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5, D-10785 Berlin.

      Related news

      Show all
      Scope has completed a monitoring review on the United States of America

      21/6/2024 Monitoring note

      Scope has completed a monitoring review on the United States ...

      Scope publishes updated supranational methodology following call for comments

      21/6/2024 Research

      Scope publishes updated supranational methodology following ...

      Global economic update: soft landing reinforces prospect of higher-for-longer interest rates

      19/6/2024 Research

      Global economic update: soft landing reinforces prospect of ...

      Belgium: nationalist parties raise risk of political gridlock and deterioration of fiscal outlook

      14/6/2024 Research

      Belgium: nationalist parties raise risk of political gridlock ...

      Europe’s shifting political landscape, limited fiscal space are challenges to closing investment gap

      12/6/2024 Research

      Europe’s shifting political landscape, limited fiscal space ...

      Scope withdraws its UK Social Housing Providers Rating Methodology

      11/6/2024 Research

      Scope withdraws its UK Social Housing Providers Rating ...