Moody’s Investors Service has been reviewing its credit ratings for Emmis Communications and recently affirmed the existing ratings. However, the outlook remains “negative” and Moody’s expects the radio company to breach its leverage covenant about a year from now.
Emmis has approximately a half billion dollars worth of securities rated by Moody’s. I n its latest action the ratings service affirmed the Caa2 Corporate Family Rating (well into junk bond territory) and Caa3 Probability of Default rating for Emmis Communications Corporation, as well as its SGL-4 speculative grade liquidity rating.
“Operating performance improved with the economic recovery, but absent debt reduction with proceeds from an asset sale or equity infusion Emmis will likely breach its leverage covenant when the covenant suspension period ends for the quarter ending November 30, 2011, in Moody’s opinion,” the ratings agency wrote.
“Emmis’ Caa2 corporate family rating and Caa3 probability of default rating incorporate expectations for a covenant breach in November 2011. Moody’s considers the company’s capital structure unsustainable, and its operations in the cyclical advertising business magnify this challenge. Furthermore, Emmis relies on two markets, Los Angeles and New York, for approximately 50% of its revenue, although its ownership of stations in top markets including Chicago as well as NY and LA, support the rating,” Moody’s said. “The negative outlook incorporates Moody’s expectations that Emmis will not comply with its maximum leverage covenant when effective for the quarter ending November 30, 2011. Inability to amend the covenants or otherwise achieve compliance would likely result in a downgrade,” the ratings statement warned.
What would help?
“Upward ratings momentum is unlikely given the highly leveraged capital structure and the covenant concerns. However, we would consider a stable outlook with an amendment providing long term covenant relief and continued improvement in operations. The ratings and / or outlook would likely consider de-leveraging asset sales favorably,” Moody’s said.
Emmis has stated in numerous SEC filings that it is interested in selling stations from its portfolio in New York and Chicago, having already LMA’d an LA station to Mexican radio giant Grupo Radio Centro, but there is no word on whether any additional divestitures are coming soon.