ITV posted first quarter numbers that came in-line with their guidance. We’ll all be aware of how TV markets have been disrupted by changes to viewing habits, caused by online streaming and the provision of “on demand” services from alternative providers such as Netflix and Amazon, as opposed to the historic UK players of the BBC and ITV.

In some respects this is proving beneficial for ITV, with their Studios business busy providing content and the joint development of a product to exploit the BBC and ITV back catalogues – “BritBox”, which should launch later this year.

The big downside for ITV is the impact these secular changes are having on advertising, which showed a 7% decline year-on-year and is expected to be down again for the rest of the year. It is worth noting, however, that some of the Q1 decline was due to the timing of Easter and a comparison to a previous year boosted by the football World Cup.

ITV always features highly in any review of likely takeover candidates, with possible bidders including the new “broadcasters” such as Netflix, Amazon or Apple, together with other operators such as Liberty Global who already hold an “investment” stake of 10%. This leads to ongoing volatility in both its bonds and associated CDS.

We, at Kames, prefer bonds that have protection language that would see coupons rise if the firm is downgraded below investment grade, giving investors compensation for an increase in perceived credit risk and an incentive for management to retain their Baa3 rating to keep financing costs lower.

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