With business improving, Moody’s Investors Service says a major restructuring or bankruptcy filing no longer appears imminent for Clear Channel Communications. So, the credit rating company has given Clear Channel’s ratings an upgrade.
Moody’s upgraded Clear Channel’s Corporate Family Rating (CFR) to Caa2 from Caa3. Additionally, Moody’s upgraded Clear Channel’s bank credit facilities to Caa1 from Caa2 and its speculative grade liquidity rating to SGL-2 from SGL-4. Moody’s also affirmed the Ca ratings of Clear Channel’s senior notes due 2016 (issued in connection with the company’s leverage buyout) and its legacy senior unsecured notes. In all, some $19 billion of rated debt is affected.
According to the ratings firm, the upgrades reflect Moody’s expectation that while the company’s capital structure remains unsustainable in the intermediate-term, a full restructuring or bankruptcy filing is no longer imminent. “In turn, recovery levels will likely improve moderately over time as compared to the low 2009 levels as cyclical pressures subside and valuation multiples and EBITDA increase, which is the primary driver for the upgrade,” said Neil Begley, a Moody’s Senior Vice President.
As expected, Moody’s anticipates Clear Channel will remain in compliance with its 9.5x secured leverage covenant over the rating horizon. The refinancing of the $2.5 billion loan to Clear Channel Outdoor (CCO) and significant cost reductions on top of the repayment of approximately $2 billion of Clear Channel’s bank debt with proceeds from the issuance of senior notes at Clear Channel Worldwide Holdings, a CCO subsidiary, will provide ample covenant cushion, Moody’s said.
Additionally, said Moody’s, the repayment of a portion of Clear Channel’s bank credit facilities eliminated more than $1 billion of mandatory debt amortization through 2015, providing helpful liquidity to avoid cash shortfalls through 2013 and therefore extending the timeframe in which the company will be able to operate as a going concern. The additional repayment was used to reduce maturing bank debt in 2014 and 2016.
But, there are still concerns down the road.
“The company’s Caa2 CFR reflects the unsustainable nature of Clear Channel’s long-term capital structure given extremely high debt-to-EBITDA leverage (15.2x at September 30, 2009 – reported) and Moody’s expectation that cash-on-hand and free cash flow generation will not adequately fund around $3.7 billion of debt maturities in 2014. The rating also incorporates Moody’s expectation that Clear Channel’s leverage metric will remain too high to attract refinancing of 2014 maturities and Clear Channel’s enterprise value (8 to 9x EBITDA) will continue to be exceeded by the gross debt levels. As a result, Moody’s projects that the company’s debt (including its pro rata portion of CCO’s debt) will exceed its enterprise value at the end of 2013 (before its large 2014 maturities come due), by between $4.7 and $6.5 billion. In Moody’s view, this implies that a restructuring of its debt will be needed, with elimination (assuming higher than 50% average recovery) of between twenty to thirty percent of Clear Channel’s debt required just to equalize the debt to value, and even more ($2 to $3 billion) to appropriately capitalize the company with equity and allow it to attract refinancing debt capital,” Moody’s said in its latest ratings statement.
Clear Channel may have some options to meet maturities and further delay a full restructuring in 2014, such as raising additional debt at CCO and using 89% of the proceeds to fund a dividend to Clear Channel, or selling assets such as up to 38% of Clear Channel’s CCO stock, Moody’s suggested. It noted that Clear Channel needs to maintain 51% ownership of CCO in order to sweep its operating cash flow.
However, these liquidity enhancers would not relieve the pressure of the debt to value deficit. “Additional distressed exchanges of bonds, essentially a continuing gradual restructuring, are probable, particularly for the notes maturing beyond 2013,” stated Begley. These would reduce the excess debt, but would not likely provide enough relief without restructuring the bank debt to meet the mountain of maturities in 2016, Moody’s said.
“The maturities of the legacy notes that mature through 2013 are likely to possess higher recoveries or be repaid in full to avoid bankruptcy – the primary objective of the current equity owners,” stated Begley.
Moody’s has taken the following rating actions:
Issuer: Clear Channel Communications, Inc.
Corporate Family Rating — Upgraded to Caa2 from Caa3
Probability of Default Rating — Affirmed Caa3
Senior Secured Revolving Facility — Upgraded to Caa1 (LGD 2, 19%) from Caa2 (LGD 3, 39%)
Senior Secured Tranche A Term Loan Facility — Upgraded to Caa1 (LGD 2, 19%) from Caa2 (LGD 3, 39%)
Senior Secured Tranche B Term Loan Facility — Upgraded to Caa1 (LGD 2, 19%) from Caa2 (LGD 3, 39%)
Senior Secured Tranche C Term Loan Facility — Upgraded to Caa1 (LGD 2, 19%) from Caa2 (LGD 3, 39%)
Senior Secured Delayed Draw Term Loan 1 Facility — Upgraded to Caa1 (LGD 2, 19%) from Caa2 (LGD 3, 39%)
Senior Secured Delayed Draw Term Loan 2 Facility — Upgraded to Caa1 (LGD 2, 19%) from Caa2 (LGD 3, 39%)
Senior Cash Pay Notes due 2016 — Affirmed Ca (to LGD 4, 57% from LGD 4, 69%)
Senior Toggle Notes due 2016 — Affirmed Ca (to LGD 4, 57% from LGD 4, 69%)
Senior Unsecured Bonds — Affirmed Ca (to LGD 5, 72% from LGD 6, 93%)
Speculative Grade Liquidity Rating — Upgraded to SGL-2 from SGL-4
Outlook — To stable from negative