Moody's disses Entercom dividend
Entercom cheered shareholders last month by announcing that it would start paying a quarterly dividend (2/23/06 RBR #38). But now Moody's has designated the company's outlook "negative" because of the 38 cents per quarter dividend (yield of over 5%). Moody's didn't change any of its ratings on Entercom's debt, but only changed its outlook from "stable" to "negative." It expressed concern about Entercom's willingness to spend for stock buybacks and start paying a dividend - - both of which are good for shareholders, but increase risk for bondholders and lenders. Moody's warned that Entercom's ratings could "face negative pressure" should the company make a large debt-financed acquisition or increase its share buybacks. Here's more of what Moody's had to say:
"The negative outlook reflects the company's willingness to take on incremental leverage in order to return cash to shareholders in the form of share repurchases and dividends. The negative outlook alsoincorporates our expectation that management is less likely to be focused on maintaining a conservative balance sheet (as evidenced by leverage under 4 times historically). Moody's notes that since the initiation of its share repurchase program in 2004 Entercom has repurchased approximately USD341 million or 19% of its shares outstanding. The company has utilized free cash flow or availability under its credit facilities, increasing debt by about 47% since YE 2003 to supplement free cash flow and fund the share repurchases as well as ongoing, though decreased, acquisition activity. Further, Entercom recently initiated a quarterly dividend of 0.38 per share, representing an approximate USD65 million use of annual free cash flow going forward.
The rating may face negative pressure if Entercom makes a large debt-financed acquisition or conducts additional share repurchases and consequently leverage increases beyond 4 times debt-to-EBITDA (currently leverage is 3.5 times for FY 2005). Moody's does not expect the rating to go up in the near-term given Entercom's propensity to return cash to shareholders. To the extent that Entercom returns its focus on debt reduction and makes additional improvements to the balance sheet from current levels, paying down debt with free cash flow, the outlook may return to stable.
The ratings are supported by Entercom's size and market presence balanced by the competition present in Entercom's larger markets and its concentration of its operations to its three largest markets - Boston, Seattle and Denver (accounting for in excess of 30% of revenues and cash flows).
Moody's affirmed the following ratings:
Entercom Radio, LLC
- Senior Subordinated Debt - - Ba2
- Corporate Family Rating - - Ba1
The rating outlook is now negative."
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