Moody’s Investor Service has downgraded the debt ratings of Entercom Communications, saying the ratings agency expects radio broadcasting revenue to come under increasing pressure due to the slowdown in consumer spending. It sees leverage increasing for the radio company, but also notes that Entercom is likely to cut back on shareholder returns and devote more free cash flow to paying down debt. Moody’s ratings outlook for Entercom is negative.
Here’s what Moody’s had to say about Entercom on Friday:
“Moody’s Investors Service downgraded the corporate family and probability of default ratings for Entercom Radio LLC (Entercom) to B1 from Ba3 and downgraded its 7.625% senior subordinated notes to B3 from B2 and changed the outlook to negative from stable. Moody’s expects radio broadcasting revenue (which consists almost entirely of 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. These revenue trends will likely pressure Entercom’s ability to maintain leverage in the mid 5 times debt-to-EBITDA range (as per Moody’s standard adjustments) as anticipated in the Ba3 rating, and also erode its cushion of compliance under the leverage covenant within its bank facility. The negative outlook incorporates Moody’s concern over a potential covenant breach.
However, Moody’s anticipates Entercom will severely curtail its historic pattern of shareholder returns and instead direct free cash flow to debt repayment, enabling the company to continue to generate positive free cash flow and to maintain leverage below 7 times despite deterioration of the top line.
In February 2008, Moody’s downgraded Entercom’s corporate family rating to Ba3 from Ba2, because the combination of increased borrowing to fund incremental share repurchases and lower than projected EBITDA led to leverage in excess of expectations. The current downgrade to B1 incorporates further deterioration of fundamental industry trends and the resultant negative impact on leverage.
Entercom’s B1 corporate family rating reflects the maturity and inherent cyclicality of the radio industry, high leverage, and some concentration of revenue within its highly competitive top 5 markets. Strong EBITDA margins and the capacity to generate free cash flow, despite weak industry fundamentals, along with geographic and format diversity, support the ratings.
The outlook is negative, and a summary of today’s rating actions follows.
Entercom Radio, LLC
….Probability of Default Rating, Downgraded to B1 from Ba3
….Corporate Family Rating, Downgraded to B1 from Ba3
….Senior Subordinated Bonds, Downgraded to B3, LGD6, 94% from B2, LGD6, 93%
Outlook, changed to negative from stable.”
RBR/TVBR observation: Anyone care to wager when we will see Moody’s report any upgrade for a radio company? It’s not that they’re beating up on radio in particular. Look at television. Look at newspapers. Look at automakers. Look at banks. There’s a lot of hurt out there.