A $2B offering of priority guarantee notes from radio giant Clear Channel looks to address debts maturing in 2014 and 2016 with new debt that will not mature until 2019. Moody’s says it’s a start on the earlier deadlines, but more will have to be done.
According to Moody’s, $1.1B comes due in 2014 and $10.2B in 2016. The current instrument will handle the entire 2014 amount and take a bite out of the 2016 as well. The problem is that the PGN being offered will also carry higher interest payments.
The offering has received a Caa1 rating from Moody’s. Meanwhile, Clear Channel’s Corporate Family Rating remains unchanged at Caa2, and its Probability of Default Rating remains at Caa3.
Clear Channel’s very high level of leverage is a major concern to Moody’s. Explaining the rationale behind its ratings, Moody’s said, “The Company’s Caa2 Corporate Family Rating (CFR) reflect the very high leverage levels of 11.7x on a consolidated basis (excluding Moody’s standard lease adjustments) and $10.1 billion of debt due in 2016 (pro-forma for the current $2 billion exchange offer). The ratings also include weak free cash flow and interest coverage of 1.3x which will be further pressured by higher interest rates from the current exchange offer in addition to future refinancing or extensions of its debt maturities. While the exchange and amendment to its credit agreement is a good first step towards refinancing its 2016 maturities, more progress will be needed and the anticipated increase in interest rates could be material. Even if Clear Channel is able to refinance its 2016 maturities, the company will remain vulnerable to a slowdown in the economy given the heightened sensitivity that its radio and outdoor businesses have to the economy. The combination of higher interest rates from a refinancing and lower EBITDA in the event of a future economic downturn could materially impair its interest coverage and liquidity position. In addition, there are secular pressures on its terrestrial radio business that could weigh on results as competition for advertising dollars and listeners are expected to increase going forward. Also incorporated in the rating, is the expectation that leverage levels will remain high over the rating horizon compared to the underlying asset value of the firm.”
Moody’s continued, “Despite the company’s highly leveraged balance sheet, Clear Channel possesses significant share, geographic diversity and leading market positions in most of the 150 markets in which the company operates. The credit also benefits from its 89% ownership stake in Clear Channel Outdoor (CCO) which is one of the largest outdoor media companies in the world, although it is not a guarantor to Clear Channel’s debt. Its outdoor assets generate attractive EBITDA margins, good free cash flow, and are expected to benefit from digital billboards that offer higher revenue and EBITDA margins than static billboards. The company’s strong positions in radio and outdoor and recent sales initiatives have allowed it to grow its national ad sales faster than many competitors in the industry. Clear Channel has also benefited from modest growth in the economy and improved operational performance which has lead to reduced debt to EBITDA levels which we expect to continue going forward. However, we expect that leverage levels will remain higher than the underlying asset value of the firm over the next several years and the company will remain poorly positioned to withstand another economic downturn in the future.”