With Emmis Communications taking on debt to buy back up to 39% of its own stock (before an expected sale of its TV group), Moody's Investors Service has placed the company's credit ratings under review for a possible downgrade. Moody's notes that the stock buyback will likely increase Emmis' debt leverage to more than eight times EBITDA. Moody's said it will conclude the review "when there is greater visibility into the company's future capital structure." Read the Moody's announcement.

RBR observation: When Emmis CEO Jeff Smulyan announced the stock buyback and potential TV sale (5/11/05 RBR #93), several analysts on the conference call questioned why the company was doing the buyback first before it raised cash from selling TV. They never really got a definitive answer, except that Emmis had decided to do it that way. The best we can figure is that Smulyan wants to act on the stock buyback now because waiting until after the TV sale many months hence could let the company's stock price creep back up to where the buyback could not find takers below the cap of 19.75 a share. Yes, that will raise leverage temporarily, but step two will bring it way down, since the TV sale is likely to bring in about three times the 400 million that Emmis will be spending on the stock buyback.

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Moody's Investors Service placed the long-term ratings of Emmis Communications Corporation ("Emmis") and its wholly-owned subsidiary, Emmis Operating Company, on review for possible downgrade following the company's recent announcement that it intends to commence a dutch auction tender offer to repurchase up to 20 million shares or 39% of the company's outstanding common stock (about $400 million in aggregate). In addition, Emmis announced that it intends to explore strategic alternatives for the company's television assets (representing about 40% of the company's cash flow at fiscal year-end 2005).

The review is prompted by the company's already high debt capitalization and the likelihood that leverage will increase and credit metrics will weaken significantly in the near-term as the company uses debt to finance the share repurchase [Thus, it is likely that leverage (measured as total debt plus preferred to EBITDA) will increase in excess of 8 times at the holding company level in the interim]. The review will focus on the ability of the company to execute on a strategic alternative for its television assets in the intermediate-term and the extent to which Emmis will use proceeds from this potential divestiture to reduce debt instead of returning cash to shareholders or seeking other strategic alternatives. Moody's will conclude the review when there is greater visibility into the company's future capital structure. In addition, Moody's lowered Emmis' speculative grade liquidity rating to SGL-3 from SGL-2.

The following ratings are under review for possible downgrade:

Emmis Operating Company

(i) Ba2 rating on its senior secured credit facilities, and

(ii) B2 rating on its $375 million of senior subordinated notes due 2012.

Emmis Communications Corporation

(i) B3 rating on the 12.5% senior discount notes due 2011,

(ii) Caa1 rating on the $143.8 million of 6.25% cumulative convertible preferred stock,

(iii) B3 senior unsecured issuer rating, and

(iv) Ba3 senior implied rating.

The SGL-3 rating indicates expectations of Emmis' adequate liquidity profile as projected over the next twelve months; however, the lowering of the company's speculative grade liquidity rating to SGL-3 from SGL-2 primarily reflects Moody's increased concerns regarding the company's limited availability to its revolving credit facility (the company will utilize the revolving credit facility to finance a portion of the common stock repurchase) and the reduced amount of cushion and financial flexibility available under its existing bank covenants pro forma for the proposed share repurchase.

Emmis Communications Corporation is headquartered in Indianapolis, Indiana and is a diversified media company comprised of radio and television stations and magazine publishing assets.