Emmis gets a Moody’s downgrade


Moody’s Investors Service has completed a review of the credit ratings begun earlier this month for Emmis Communications. Given the tough market conditions in radio, it should come as no surprise that Moody’s has downgraded ratings on some $744 million of debt that Emmis has outstanding. The ratings agency also set the ratings outlook at “negative.”

In its latest ratings downgrade in the radio sector, Moody’s had this to say about radio  in general and Emmis in particular:

“Moody’s Investors Service downgraded Emmis Communications Corporation’s ("Emmis") Corporate Family Rating to Caa1 from B2, its probability-of-default rating to Caa2 from B2 and its Series A cumulative convertible preferred stock to Ca from Caa1. In addition, Moody’s downgraded Emmis’s speculative grade liquidity rating to SGL-4 from SGL-3. Moody’s also downgraded Emmis Operating Company’s secured bank credit facilities ($145 million revolver due 2012 and $455 million tranche B term loan due 2013) to Caa1 from B2. The rating outlook is negative. This concludes Moody’s review initiated on October 15, 2008.

The rating downgrades reflect Moody’s concerns regarding continued internal operating challenges at Emmis’ New York and Los Angeles stations and our belief that Emmis’ credit metrics will likely deteriorate in the face of a further slowdown in the economy. Moody’s expects radio broadcast revenues, which are highly reliant on cyclical advertising, to 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 believes that Emmis’ revenue and cash flow could deteriorate such that debt-to-EBITDA leverage exceeds 10x, free cash flow turns negative and other credit metrics weaken considerably.

The SGL-4 rating specifically reflects Moody’s concerns that the company’s ability to remain in compliance with its financial maintenance covenants is highly uncertain when the leverage covenant steps down in May 2009, despite the company’s recent efforts to manage costs at the operating company to help maintain covenant compliance.

The negative outlook reflects our concerns regarding Emmis’ ability to maintain covenant compliance. While Emmis had a significant cash balance of $68 million at 8/31/2008, expected negative free cash flow will erode some of this liquidity. In addition, a potential remedy of covenant problems could involve a significant step-up in pricing, thereby further pressuring the company’s cash flow. In the current credit environment, Moody’s deems less likely the prospect of the company’s bank group merely waiving the projected technical covenant default while dividend payments on the preferred stock continue to get paid and exposure to undrawn revolving credit facility commitments remains minimal. Rather, it is increasingly likely that exposure will be immediately curtailed at the first opportunity, particularly if cash balances remain, in an effort to preserve value. In consideration of this, Moody’s has reverted to an above-average (65%) mean family recovery expectation in a restructuring scenario, the impact of which partially mitigates the severity of rating downgrades for the bank debt in particular, as further evidenced in reduced LGD rates on the rated securities.

Moody’s has taken the following rating actions:

Emmis Communications Corporation

Corporate Family Rating — downgraded to Caa1 from B2

Probability-of-default rating — downgraded to Caa2 from B2

Series A cumulative convertible preferred — downgraded to Ca (LGD 6, 96%) from Caa1 (LGD 6, 99%)

Speculative grade liquidity rating — downgraded to SGL-4 from SGL-3

Outlook — Revised to Negative from Review for possible downgrade

Emmis Operating Company

$145 million revolver due 2012 — downgraded to Caa1 (LGD 3, 33%) from B2 (LGD 4, 50%)

$455 million tranche B term loan due 2013 — downgraded to Caa1 (LGD 3, 33%) from B2 (LGD 4, 50%)

Outlook — Revised to Negative from Review for possible downgrade

Emmis’ rating reflects the company’s high debt-to-EBITDA leverage of 8.1x (based on EBITDA for the trailing twelve months ended August 31, 2008) and Moody’s expectation that leverage will increase over the next twelve to eighteen months as cash flow continues to deteriorate due to the cyclical downturn in the industry. The rating also incorporates Emmis’ significant revenue concentration in New York and Los Angeles, continued weak station operating performance vis-a-vis the markets as well as revenue pressure on the markets themselves and the maturity and inherent cyclicality of the radio industry.

Emmis’ rating is supported by its large-market presence and growth of its international radio operations, which offer revenue and cash flow diversification benefits to the company.

Emmis Communications Corporation ("Emmis"), headquartered in Indianapolis, Indiana, is a diversified media firm with radio broadcasting and magazine publishing operations. Emmis owns 21 FM and 2 AM radio stations in the U.S. Emmis also owns a radio network, international radio stations and regional and specialty magazines.”