Analysts cautious on radio bonds


Wells Fargo Securities high yield bond analysts Bishop Cheen and Davis Hebert are out with a massive update on media sector bonds. Let’s deal with the bad news first – that would be radio company bonds.

“Certainly, we think radio earnings have upside in 2010, after one of the worst years in the industry’s history, where revenue fell more than 15% year-over-year (and this followed six years of flattish industry revenue). But where TV can point to high-margin retransmission consent fees, the political tidal wave and station Web sites to complement the local news product, radio has few incrementals in its long-term outlook. Live streaming and HD Radio are admirable opportunities, but neither has taken off in terms of usage and advertising sales,” Cheen and Hebert wrote.

They have an “underweight” recommendation on the radio sector for bond investors in 2010. The analysts note that with its huge public debt, Clear Channel Communications accounts for 85% of their high-yield radio bond index. Cheen and Hebert have an “underperform” rating on all Clear Channel bonds due 2012 and thereafter. Earlier maturing (2010-2011) CC bnds are ranked “market perform” along with most of the other radio bonds that the Wells Fargo analysts cover.

Radio One, however, qualifies for an “outperform” rating, for its two bond issues due in 2011 and 2013.

“We are upgrading our recommendation to an outperform from an underperform on the two of group station owner and Web site aggregator Radio One because, frankly, we are tired off watching them go up. Nothing much has changed on the fundamentals of the recession hammered company whose radio, Internet and cable network assets have been targeted at African Americans during the past year, except that bondholders have become more comfortable shouldering all the unknowns,” the two analysts wrote.

Radio One has debt coming due that it needs to refinance, but the analysts note that companies in worse situations have been able to find money. Also, Radio One’s debt leverage of 7X EBITDA is relatively moderate compared to its peers. Cheen and Hebert admit that they have no insight into how Radio One is going to resolve its capital challenge, but they say they are “upgrading our recommendation purely on speculation that the market will help Radio One help itself in anticipation of better earnings and a more appropriate balance sheet ahead.”

What do they see for the overall radio industry? The two are not bullish on the idea of a big rebound. “In 2010, we forecast radio industry revenues to be up low single digits, which would place industry sales somewhere between $16.5 and $17.0 billion,” Cheen and Hebert told their clients. That, they noted, is a far cry from the $19.5 billion seen as recently as 2008.