Citadel Broadcasting is working to refinance the $763 million of senior debt it has on its books from its emergence from Chapter 11 with a combination of bonds and a new credit facility. Both have now been rated by Moody’s Investors Service.
Moody’s assigned a Baa3 rating to the proposed $400 million senior secured first-lien credit facility. That’s significant because Baa3 is an investment grade rating, albeit the lowest one in the Moody’s rankings.
A rating of Ba3, three steps below investment grade, was assigned to the proposed offering of $500 million in senior unsecured notes due 2018.
Moody’s retained its Ba2 Corporate Family Rating (CFR) for Citadel, but changed the company’s Probability of Default Rating (PDR) to Ba2 from Ba3 “to reflect the lower probability of default present in such hybrid debt structures.”
Here is the ratings rationale from Moody’s:
“The proposed senior secured credit facility consists of a $150 million 3-year revolver and a $250 million 6-year term loan B. The Baa3 rating on the facility reflects its senior most position in the capital structure and benefits of the collateral package, which includes a first priority lien on all the assets and stock of domestic subsidiaries and 65% of capital stock of foreign subsidiaries. The rating also reflects the cushion provided by the senior unsecured notes which make up the majority of the debt structure. The terms of credit facility include an excess cash flow sweep of 50% if secured leverage exceeds 1.0x and total leverage exceeds 3.0x. The proposed senior unsecured notes have an 8-year tenor and are guaranteed by material domestic subsidiaries. The Ba3 rating on the notes reflects their lower rank in the capital structure and that they are unsecured. The notes benefit however, from guarantees from Citadel’s operating subsidiaries.
The Ba2 CFR reflects the company’s moderate post-emergence debt-to-EBITDA ratio of around 3.6x as of 9/30/10 (incorporating Moody’s standard adjustments) and Moody’s expectation that over the intermediate term, Citadel will apply free cash flow towards debt repayment in order to strengthen its balance sheet and sustain financial leverage in the low 3.0x range (including Moody’s standard adjustments). Citadel’s ratings also reflect its significant exposure to cyclical advertising spending as evidenced by the company’s steep revenue decline during the 2009 recession. The rating considers the company’s strong EBITDA margins, in the 30% range, and significant cash flow generated from a well-clustered radio station portfolio that is diversified by programming formats, geographic regions, audience demographics and advertising clients. In Moody’s opinion, Citadel’s experienced management team and its commitment to prudent financial policies, including an expected balanced allocation of some of its cash generation towards debt reduction, in addition to acquisitions and shareholder returns, provide incremental support to the company’s ratings.
The SGL-2 rating incorporates our expectation that Citadel will maintain a good liquidity position over the next twelve months. Internal sources of liquidity include cash on hand and projected free cash flow of over $100 million per year, which together provide ample liquidity to cover the company’s operating cash needs and $2.5 million of annual term loan amortization. Moody’s anticipates that there will be more than adequate cushion under the company’s leverage and interest coverage tests and that the company will remain in compliance with financial covenants over the next twelve to eighteen months.”
Here is a summary of the ratings actions:
..Issuer: Citadel Broadcasting Corporation
….Probability of Default Rating, Upgraded to Ba2 from Ba3
..Issuer: Citadel Broadcasting Corporation
….Senior Secured Revolving Credit Facility, Assigned Baa3, LGD2 – 15%
….Senior Secured Term Loan Facility, Assigned Baa3, LGD2 – 15%
….Senior Unsecured Notes, Assigned Ba3, LGD5 – 71%
RBR-TVBR observation: It looks like the vulture investors who gobbled up Citadel’s distressed debt prior to its Chapter 11 filing have done pretty well. They’re now cashing out of the $763 million in senior debt they were holding as the company exited Chapter 11. We identified many of those investment funds 11 months ago when the plan was filed with the US Bankruptcy Court. What’s not known is which ones are still holding the new stock they received and which have already sold. The Class A stock most recently traded at $24.50, around the middle of its trading range since it began trading on the OTC pink sheets. The warrants, which are exchangeable one-for-one for Class A shares, had traded as high as $28 when the securities first began trading around the beginning of August. Trading continues to be very thin for both issues, as well as the Class B shares, but pricing has been fairly firm and it seems pretty certain that the funds which bought discounted debt in the months ahead of the Chapter 11 filing came out with a profit.