You can add Cumulus Media to the growing list of broadcasting companies who have had their credit ratings cut by Moody’s Investors Service. Along with downgrading its ratings, Moody’s also said the outlook for Cumulus is negative, setting the stage for yet another downgrade.
Here’s the bad news from Moody’s:
“Moody’s Investors Service downgraded Cumulus Media Inc.’s ("Cumulus") Corporate Family Rating ("CFR") to B3 from B1, its Probability of Default Rating to Caa1 from B2 and the rating on its $850 million credit facility ($100 million revolver due 2012 and $750 million term loan due 2014) to B3 from B1. The rating outlook is negative. This concludes Moody’s review that was initiated on November 3, 2008.
The rating downgrades reflect Moody’s expectation that Cumulus’ revenue and cash flow will likely come under increasing pressure due to the slowdown in consumer spending, its impact on corporate profits, and the resulting cutbacks in advertising and marketing budgets by several industries. Moody’s therefore believes that Cumulus’ debt-to-EBITDA leverage will not trend towards the mid-6x range commensurate with its former B1 rating. The negative outlook reflects Moody’s concerns over uncertainty regarding Cumulus’ ability to remain in compliance with its financial maintenance covenants under its credit facility, especially when the leverage covenant steps down in Q1 2009. Moody’s believes that a potential remedy of covenant problems could involve a significant step-up in pricing, thereby pressuring the company’s cash flow. Notably, the company had a significant cash balance of $61 million as of 9/30/2008, and Moody’s expects the company to use this cash to predominantly pay down its debt rather than for shareholder-friendly activities.
Moody’s has taken the following rating actions:
Cumulus Media Inc.
Corporate family rating — downgraded to B3 from B1
Probability-of-default rating — downgraded to Caa1 from B2
$100 Million Secured Revolver due 2012– downgraded to B3 from B1 (LGD 3, 34%)
$750 Million Secured Term Loan due 2014 — downgraded to B3 from B1 (LGD 3, 34%)
Outlook – Revised to Negative from Under Review for Possible Downgrade
Cumulus’ B3 CFR reflects high debt-to-EBITDA leverage of 7.8x (incorporating Moody’s standard adjustments) at 09/30/2008, expectations for deterioration of revenue and cash flow over the next 12-18 months due to the weak economic and advertising climate, and consequently weaker credit metrics as well as concerns regarding potential covenant violations under the credit facility. In addition, the rating reflects the inherent cyclicality of the advertising business, cross media-competition faced by radio for audience and advertising revenue, and the maturity of the radio business.
Cumulus’ ratings continue to benefit, nonetheless, from the geographic and cash flow diversity of the company’s station portfolio, its clustering strategy which yields format diversity, and dominant market positions and heavier proportion of local advertising revenue.”