As Cumulus Media lines up financing for its Citadel and CMP transactions, the credit ratings agencies are giving it thumbs-up signs. Moody’s Investors Service has given Cumulus and upgrade, just as S&P did.
Moody’s said it had upgraded Cumulus Media’s Corporate Family Rating (CFR) to B1 from Caa1 due to the company’s pending acquisition of CMP Susquehanna Corp. (CMP) in the second quarter of 2011 followed by the announced $2.4 billion acquisition of Citadel Broadcasting Corporation (Citadel) later this year. Transactions will be financed with approximately $3 billion of new debt facilities as well as up to $500 million of new equity, the ratings agency noted. Moody’s assigned a B3 (LGD6-90%) rating to the company’s proposed $610 million senior unsecured notes due 2019 which will be used to refinance current outstandings under Cumulus’ senior secured credit facilities. Moody’s also assigned Ba3 (LGD3-38%) ratings to the proposed $375 million senior secured revolver and $2,040 million senior secured term loan B which will be used to refinance existing debt of CMP and Citadel.
Moody’s assigned a Speculative Grade Liquidity Rating 2 (SGL-2) “based on expectations of good liquidity over the next twelve months.” The rating outlook is stable.
Here’s the analysis from Moody’s:
The B1 corporate family rating reflects Cumulus’ high pro forma debt-to-EBITDA leverage of approximately 5.7x estimated for 12/31/2011 (including Moody’s standard adjustments and treating 75% of preferred shares as debt, if issued) and assuming selling shareholders of Citadel
require the maximum amount of cash payments, instead of stock. Ratings also reflect the cyclical nature of radio advertising demand evidenced by the revenue declines suffered by radio broadcasters during the recent recession, fragmentation of media outlets, and potential challenges
associated with a large acquisition (Citadel has $740 million in revenue and 225 stations compared to $445 million in revenue and 346 stations for the combined Cumulus and CMP). Ratings are supported by the company’s national scale, geographic and market diversity as well as expected 40%EBITDA margins. Post-transactions, Cumulus is expected to generate more
than $300 million of annual free cash flow, or 10% of debt balances, from a well-clustered radio station portfolio that is effectively diversified by programming formats and audience demographics. Although revenues are expected to grow in the low to mid-single digit range through 2012, planned cost reductions will contribute to increasing free cash flow generation and debt reduction resulting in improved credit metrics.
“Management has a multi-year track record of refining its proprietary technology platform and has been successful in driving down costs resulting in industry leading EBITDA margins. Management also confirms its strategy to reduce debt balances and targets reported gross debt-to-EBITDA ratios of 4.0x or better to gain operational and financial flexibility. In Moody’s opinion, Cumulus’ experienced management team and commitment to reduce debt balances provide rating support,” stated Carl Salas, a Moody’s Vice President and Senior Analyst.
Moody’s believes the acquisitions will receive FCC approval and be completed by year end 2011 based on minimal market overlap in 6 markets. Approximately 13 stations have been identified for transfer to a trustee. Ratings assume successful execution; however, in the unlikely event the
Citadel acquisition is not completed and there are no equity injections, the proposed $375 million revolver and $2,040 term loan would not be needed, and ratings could be downgraded given debt-to-EBITDA leverage of approximately 6.7x for the Cumulus borrowing group (including Moody’s standard adjustments and assuming payment of Cumulus’ portion of the
The stable outlook reflects Moody’s view that the acquisitions of CMP Susquehanna and Citadel will be completed in the expected time frame and that revenue and EBITDA will track along management’s plan including success in achieving most of its synergy targets. “The outlook also
incorporates Moody’s expectation that Cumulus will maintain good liquidity and use free cash flow to reduce revolver or term loan balances resulting in debt-to-EBITDA leverage remaining below 6.0x (including Moody’s standard adjustments) with free cash flow-to debt ratios of more
than 9% in the near term. Financial metrics are expected to improve thereafter, consistent with management’s target of 4.0x reported grossdebt-to-EBITDA (or approximately 4.1x including Moody’s standard adjustments),” added Salas.
Ratings could be upgraded if debt-to-EBITDA ratios are sustained below 4.5x (including Moody’s standard adjustments) with good liquidity including free cash flow-to-debt ratios remaining above 10%. Absent sizable acquisitions, debt balances would also need to remain below $2.4 billion to accommodate likely EBITDA fluctuations in an economic downturn.
Ratings could be downgraded if debt-to-EBITDA ratios are sustained above 6.0x (including Moody’s standard adjustments) due to the inability to achieve planned synergies or due to deterioration in performance as a result of increased competition in key markets, an economic downturn, or audience and advertising revenue migration to competing media platforms.
Ratings could also be downgraded if leveraging events such as debt financed acquisitions or dividends result in debt-to-EBITDA ratios being sustained above 6.0x or if there is deterioration in liquidity. In the unlikely scenario the Citadel acquisition is not completed as planned and
an equity injection is not funded, the proposed $375 million revolver and $2,040 million term loan would not be needed, and the CFR would likely be downgraded given potential debt-to-EBITDA ratios of approximately 6.7x for the Cumulus borrowing group (including Moody’s standard adjustments and assuming payment of Cumulus’ portion of the termination fee), a lower revenue base, as well as the absence of broader geographic and market diversification. In addition, coverage ratios would be weaker with approximately 1.8x EBITDA coverage of interest expense compared to approximately 3.2x under the Citadel acquisition scenario, and the
committed revolver facility due May 2012 would be relatively small at only $20 million. Ratings on the new $610 million of Senior Unsecured Notes could potentially be downgraded.
Here are Moody’s ratings actions:
..Issuer: Cumulus Media, Inc.
….Corporate Family Rating, Upgraded to B1 from Caa1
….Probability of Default Rating, Upgraded to B1 from Caa2
….$610 million Senior Unsecured Notes, B3 (LGD6-90%) – expected to be assumed by Cadet Holding Corporation when acquisition closes
..Issuer: Cadet Holding Corporation
$375 million Senior Secured Revolver, Ba3 (LGD3-38%)
$2,040 million Senior Secured Term Loan, Ba3 (LGD3-38%)
To Be Withdrawn As Applicable Transactions Close:
Issuer: Cumulus Media, Inc.
$20 million Senior Secured Revolver, Caa1 (LGD3-34%)
$648 million Senior Secured Term Loan, Caa1 (LGD3-34%)
Issuer: CMP Susquehanna Corp.
… PDR, Caa1
$100 million Revolver due 2012, Caa1 (LGD3-48%)
$700 million Term Loan due 2013, Caa1 (LGD3-48%)
…$250 million Sr Subordinated Notes due 2014, Caa3 (LGD6-96%)
Issuer: Citadel Broadcasting Corporation
$150 million Sr Sec Revolver, Baa3 (LGD2-15%)
… $350 million Sr Sec Term Loan B due 2016, Baa3 (LGD2-15%)
$762 million Sr Sec Term Loan due 2015, Ba2 (LGD3-33%)
$400 million 7.75% Sr Notes due 2018, Ba3 (LGD5-71%)
Outlook is Stable