The waiting is over. A few weeks ago Moody’s Investors Service said it was still reviewing its credit ratings for Media General after the TV/newspaper company completed a long-sought refinancing. Now Moody’s has completed its assessment.
Moody’s has downgraded Media General’s Corporate Family Rating (CFR), Probability of Default Rating (PDR) and senior secured notes due 2017 rating to Caa1 from B3, concluding the review for downgrade initiated on February 13, 2012.
“The downgrade reflects the significant increase in interest expense associated with the company’s credit facility amend and extend transaction and an assumed issuance of at least $225 million of new notes, which will result in limited free cash flow generation and constrain Media General’s capacity to reduce its very high leverage. The weak free cash flow and high leverage create vulnerability to changes in the company’s highly cyclical revenue and EBITDA generation,” said the ratings agency, adding that “The rating outlook is stable.”
Moody’s noted that Media General intends to utilize the net proceeds from an assumed bond offering to fund at least a $190 million pay down of its senior secured term loan as well as a liquidity reserve account. Completing the bond offering and term loan pay down by May 25, 2012 are conditions to extending the maturity of Media General’s credit facility from March 2013 to March 2015. The new ratings by Moody’s anticipate that Media General will be able to complete the bond offering, “but an inability to do so and extend the credit facility maturity would heighten liquidity pressure and increase near-term default risk,” the ratings statement warned.
Moody’s calculated that the refi transactions have added approximately $25 million to Media General’s annual interest expense.
Here is some of the ratings rationale from Moody’s:
“Media General’s Caa1 CFR reflects the company’s good local market media position, vulnerability to cyclical advertising downturns, very high leverage, limited free cash flow generation, and restructuring risk absent an improvement in earnings or a reduction of cash interest costs. The company has good local news and information infrastructure, strong local advertiser relationships, and markets with generally favorable long-term growth prospects. Revenue is concentrated in the Southeast and is vulnerable to cyclical client spending, which creates heightened risk that the company would not be able to manage its high leverage position if the US economy were to weaken. Media General’s mature newspapers and, to a much lesser extent, broadcast properties are also facing increasing competition as media consumption habits shift to online and digital platforms. Moody’s believes this will pressure print advertising volumes and weaken pricing power over the long-term. High debt-to-EBITDA leverage (7.8x FY 2011 incorporating Moody’s standard adjustments and the average EBITDA for the last two years) and limited free cash flow generation reduce financial flexibility to manage the operating, cyclical and refinancing challenges. Moody’s believes that, over the intermediate term, Media General will have difficulty reducing its total debt-to-EBITDA leverage ratio (averaged over even and odd years to account for political advertising revenue patterns; the ratio was approximately 6.3x as of 12/25/11) to the 5.0x long-term target it announced on April 9, 2012 based on projected earnings and cash flow levels.
A refinancing would favorably extend maturities and provide Media General additional time to execute its strategy to grow revenue, rationalize operating costs, and dispose of its publishing assets. Moody’s projects Media General’s EBITDA will increase approximately 40% in 2012 and that the company will generate approximately $10-15 million of free cash flow during the year. Moody’s expects a continued recovery in automotive advertising and the lift from political and Olympic advertising will boost broadcast earnings significantly while sizable cost reductions will lead to flat to slightly higher earnings at its publishing properties. Moody’s expects Media General will have negative free cash flow in 2013 during the off-political year with minimal to negative combined free cash flow for 2012 and 2013.
Media General would still have intermediate-term refinancing risk if the assumed bond offering is completed, with approximately $170 million of term loans due in March 2015 and $300 million of existing senior secured notes due in February 2017 (the maturity date of the assumed notes has yet to be determined). Moody’s believes Media General’s limited free cash flow generation and high leverage could create elevated restructuring risk as it seeks to address these maturities. However, Moody’s believes recovery would be reasonably good if the company were to default as Media General’s average 2011-2012 broadcast EBITDA is projected to be in a $100-$110 million range. Depending on valuation multiples and performance at the time of any restructuring, this level of broadcast earnings should provide better than average recovery of Media General’s approximate $700 million of debt pro forma for the refinancing.
Moody’s believes that Media General’s announced plan to divest its publishing assets favorably clarifies the strategic focus of the company on broadcast and digital assets. Moody’s nevertheless believes a transaction would be leveraging to Media General as expected sale multiples for newspaper assets (mid to low 4x range based on recent transactions) will be below its current leverage. Media General estimates approximately 60% of its $181 million under-funded pension obligation (as of 12/25/11 including $49 million under non-qualified plans) are associated with its publishing assets. Depending on how a sale is structured, Media General could reduce its cash interest costs modestly as well as required pension contributions and capital spending. Moody’s expects a sale would reduce the company’s free cash flow generation and a sale of higher multiple broadcast stations could be necessary to reduce debt and leverage if earnings do not improve. Moody’s does not currently expect the divestiture of publishing assets would affect Media General’s CFR, but the final terms of any transaction would need to be evaluated.”
..Issuer: Media General, Inc.
…. Corporate Family Rating, Downgraded to Caa1 from B3
…. Probability of Default Rating, Downgraded to Caa1 from B3
….Senior Secured Regular Bond/Debenture, Downgraded to Caa1, LGD3 – 46% from B3, LGD3 – 44%
..Issuer: Media General, Inc.
….Outlook, Changed To Stable From Rating Under Review