Credit rating agency Fitch Ratings has released a massive commentary on the credit outlook for various media sectors. As you’ve probably guessed, the outlook is negative for both radio and TV station owners – although the Fitch analysts do note some positives as well.
Fitch analysts Mike Simonton, Jamie Rizzo, Rolando Larrondo and Levin Lam looked at the length and breadth of the media industries to produce their 204-page “Fitch Credit Encyclo-Media” report. For advertising-supported media, there were a lot of sectors given “negative” outlooks – “Radio” and “TV Broadcasting Affiliates” were among them. That should not come as any surprise to people working in that sector, in light of the severe advertising downturn this year.
Going into 2009, Fitch Ratings had warned that a number of highly leveraged media companies had capital structures “that would prove untenable under an economic and capital market stress” and that defaults in the media and entertainment sector would exceed other corporate sectors. Indeed, three media companies which had been rated by Fitch filed for bankruptcy since last year’s report: R.H. Donnelley Corp. (Yellow Pages), Six Flags (theme parks) and Tribune Company (newspapers/broadcasting). The default rate across the media and entertainment sector is 10%, against and average of 7% for all corporate issuers.
Looking forward, the Fitch analysts say radio enjoys some barriers to entry, due to the limited number of FCC licenses, but even so some markets appear to have too much inventory. “Given the difficulty in controlling advertising inventory levels and cross-media competition in local markets from TV broadcasting, outdoor, newspapers, Yellow Pages, and the Internet, the major station groups (Clear Channel, CBS, Citadel, Cumulus, Cox Radio, Univision, Emmis, Entercom) face the same challenges that participants in highly fragmented industries face,” the report says. High operating margins and low capital expenditures are a plus for the business, so operators who are not so heavily leveraged may be able to withstand the current downturn and still generate positive cash flow.
The Fitch outlook for the radio sector, though, is negative. “Fitch expects listenership to continue to be pressured, inventory should remain relatively stable, and pricing will be under pressure due to cyclical factors. Satellite radio subscribers have likely peaked, but combined with the proliferation of other music devices (e.g. iPods played through car stereos), will continue to pressure listenership. Radio is a lower-priced medium than newspapers or TV broadcasting, which makes indirect competition (share shifts away from radio) less of a concern than direct competition from the flood of stations in most markets. Internet streaming provides additional day parts to sell but should not make a material difference in the financial profile of the broadcasters,” the report said.
The analysts say it’s not clear that new Internet competitors to radio have a viable business model, but while they exist they will continue to pressure AM and FM broadcasters by competing for ears. On the plus side, more HD Radio receivers are being rolled out in automobiles. The Performance Royalties Act pending in Congress would increase costs for radio stations, should it be passed into law – the analysts noted as a potential negative.
For the television stations business, the report says advertising revenues are derived from three sources: original news programming (which Fitch estimates at 40%), local ads on network shows (30%) and local ads on syndicated shows (30%). Most of those ad sales by local affiliates come from local and regional advertisers, but 20% or more for some stations from national spot.
The report notes that affiliates have relatively high fixed-cost structures and do not control a large amount of the content that they broadcast. DVRs, VOD and online viewing are altering primetime viewing, where stations have traditionally promoted their late local news to drive viewership. Also, revenues are highly cyclical, due to election/Olympic years. “However, affiliates’ capacity to withstand a downturn is bolstered by the high margins (typically greater than 25%) and strong free cash flow conversion. Fitch believes most moderately levered TV station groups could generate positive free cash flow in a downturn,” the report says.
With no federal elections, car dealer closures and general economic weakness, 2009 has been a soft year for the local TV station business, the Fitch analysts noted, although that has been counterbalanced somewhat by retransmission consent fees and efforts to take local market ad share from newspapers and radio.
The outlook, however, is negative. “Going into 2010, political ads should also help tighten inventory and support pricing from relatively low levels. Longer term, Fitch believes there is an over-capacity of premium-priced media outlets in most local markets. This imbalance will continue to rationalize over the next several years, with dollars flowing out of these outlets and toward emerging media. Fitch believes the lower-rated stations (CW and MyNetwork-affiliated stations among others) that are unable to sufficiently aggregate the local market audiences will bear a disproportionate share of the outflow,” the Fitch analysts wrote.
RBR-TVBR observation: Don’t shoot the messenger. It’s no secret that many broadcasting companies have leverage problems and need to fix their balance sheets. Money won’t really flow back to radio and TV to finance transactions until the advertising climate improves and debt holders can be confident of what lies ahead.