On a scale of 1.0 to 5.0 with 1.0 the best, the Moody’s Investors Service says the bond issues of broadcast and media companies get a Covenant Quality score of 3.34, slightly better than the 3.4 for all non-financial sector bonds. But when restricted payment issues are isolated, the score goes up and compares unfavorably to two other media categories.
However, its not a total loss – it tends to dissuade the issuers from incurring addition debt, according to Moody’s.
When looking at restricted payments, the broadcast/media score shoots in the wrong direction to 3.8, compared scores of 3.6 for cable and 2.66 for newspaper/publishing.
VP/Senior Analyst Carl Salas commented “The weaker restricted payments score reflects the prevalence of private equity sponsors in broadcast and media services company bond issues, and they favor the flexibility to make restricted payments to increase investment returns. Nevertheless, this weakness is offset by strong protection against debt incurrence and liens and structural subordination.”
Moody’s explained the scoring: “Stronger protection against debt incurrence results from the sector’s high leverage, in addition to the potential for elevated dividends payouts. And indeed these companies are much more likely to use a leverage ratio test to regulate debt incurrence than the looser fixed-charge coverage ratio test used in most other corporate bond deals. Overall, however, the covenant protections in broadcast and media services company bond issues have deteriorated more than those of other North American non-financial corporates in the past two years, particularly in terms of restricted payments. The average covenant quality score for bonds issued by broadcast and media services companies was 3.65 in 2012, compared with 2.99 in 2011, and for restricted payments the score declined to 4.19 in 2012 from 2.93 a year earlier.”