Noteholders seemed to like the swap offered them by Nexstar, since it was oversubscribed. But Moody’s Investors Service has now assailed the swap as “tantamount to a default” and downgraded $691 million of Nexstar’s debt. Moody’s concedes that the move provides an immediate improvement to Nexstar’s covenant compliance cushion, but says that underscores the “high probability of another subsequent default.”
“Moody’s Investors Service has downgraded Nexstar Finance Holdings, Inc.’s (“Nexstar”) Corporate Family rating to Caa1 from B3 and its Probability of Default rating to Ca from B3 following the company’s announcement that it has commenced a tender offer to exchange its cash-paying senior subordinated notes for new subordinated notes of similar amount and maturity, but which do not pay cash interest until January 2011. Moody’s views this transaction, upon its assumed successful completion, as tantamount to a default. The proposed new exchange notes are not rated,” Moody’s said in a rating announcement.
The ratings actions are below. Here is the rest of Moody’s commentary:
“The downgrade of the CFR to Caa1 reflects Nexstar’s reliance upon the success of a current exchange offer to avert a potential liquidity squeeze and the likelihood that, even if the proposed exchange is successfully concluded, the company still faces the heightened prospect of further default under the terms of its credit agreement, absent an amendment. Furthermore, the downgrade incorporates Moody’s view that the company’s broadcast assets are likely worth substantially less than the current level of its debt, particularly given currently weak investor appetite for broadcast acquisitions, although above-average recovery for the corporate enterprise relative to historic norms for large corporates is noted, nonetheless. The downgrade of the subordinated debt rating in particular to Ca specifically reflects Moody’s estimate of ultimate credit losses to be realized by these creditors at the time of the limited default, consistent with both terms of the exchange offer and current trading prices for the securities subject to exchange.
The downgrade of the PDR to Ca reflects Moody’s view that Nexstar’s proposed exchange offer, if successfully concluded, constitutes an effective distressed exchange event of default. Moody’s expects to change the PDR to “Caa2/LD” upon completion of the exchange offer which is set to expire on or prior to March 26, 2009, incorporating this view of a limited default occurring and ongoing Caa2-type risk of subsequent default. While Moody’s recognizes that the proposed exchange will bring an immediate improvement to the company’s covenant compliance cushion, the forward-looking Caa2 PDR underscores our view that the company faces a high probability of another subsequent default. In conjunction with a meaningful layer of junior capital to cushion loss absorption for the bank group, this risk is exacerbated by step-downs in the senior secured bank leverage covenant scheduled to occur in Q409, which will likely prove difficult to comply with if the current pace of declining market spending on TV advertising continues unabated over the near term. Moody’s anticipates that subordinated debt not subject to the exchange and which remain cash pay instruments will carry a Caa2 rating when the limited default event passes.
The negative rating outlook incorporates Moody’s concern that the immediate benefits provided to the company by the proposed debt exchange (including lower cash interest expense and a wider margin of covenant compliance), along with the benefits of increasing digital and retransmission-based revenues and a moderation of capex (following the completion of major facility upgrades) more broadly, will be insufficient to offset the effects of continuing top line erosion in the face very soft market conditions.”
RBR/TVBR observation: Covenant compliance will continue to be a big issue this year. Broadcasters (and people in many other industries) are going to do what it takes to remain in compliance with their loan covenants or negotiate new terms with their lenders. Bankers really don’t want borrowers to go into default, so it’s a matter of negotiating terms that will work for both sides to keep operating through these turbulent financial seas. Covenant compliance and reworking covenants were major topics in the recently published RBR/TVBR Financial Roundtable.
Moody’s has taken the following rating actions:
Nexstar Finance Holdings, Inc.
Corporate family rating — downgraded to Caa1 from B3
Probability-of-default rating — downgraded to Ca from B3
11.375% senior discounts notes due 2013 — downgraded to Ca (LGD 5, 84%) from Caa2 (LGD 6, 94%)
Nexstar Broadcasting, Inc. (including Mission Broadcasting, Inc.)
Revolving credit facilities due 2012 — affirmed B1 (to LGD 2, 14% from LGD 2, 25%)
Senior secured term loans due 2012 — affirmed B1 (to LGD 2, 14% from LGD 2, 25%)
7% Senior subordinated notes due 2014 — downgraded to Ca (LGD 4, 55%) from Caa1 (LGD 5, 74%)
Nexstar’s SGL-4 liquidity rating is unaffected by this rating action
The rating outlook is negative.
Moody’s does not rate Nexstar’s privately-placed $36 million of senior subordinated notes due 2014.