The debt rating agency says it expects Clear Channel Communications to be in violation of its secured debt leverage covenants by the end of 2009. Moody’s Investors Service has downgraded Clear Channel’s corporate family rating and its probability of default rating, completing the review that began in February.
Moody’s said it has downgraded Clear Channel Communications, Inc.’s Corporate Family Rating and Probability-of-Default Rating to Caa3 from B2. Moody’s also downgraded the Company’s senior secured credit facilities to Caa2 from B1 and all senior unsecured notes to Ca from Caa1. In addition, Moody’s downgraded Clear Channel’s speculative grade liquidity rating to SGL-4 from SGL-2. “The ratings downgrade reflects Moody’s belief that there is a high probability that the company will violate its secured 9.5x leverage covenant this year, and that when this occurs, a debt restructuring will be likely,” Moody’s said, adding that the outlook for Clear Channel has been revised to negative.
“Late in the third quarter of 2008, Moody’s revised its view regarding 2009 broadcasting industry revenue declines versus 2008 to between 15% and 20%, and outdoor advertising down between 7% and 10%. Subsequently, Moody’s took rating actions that reflected revenue assumptions at the low end of these ranges. Under these assumptions, Clear Channel appeared to have sufficient headroom within its very liberal bank credit agreement covenants to withstand the cyclical decline at least through 2009. However, in February 2009, we adjusted our revenue decline assumptions to reflect our concerns that cyclical weakness for both radio broadcasting stations and outdoor advertising would be somewhat worse than our low-end assumption for 2009. As a result, our current assumption for Clear Channel’s 2009 revenue decline was raised to the upper teens, which reflects the high end of our range for radio, and outdoor advertising revenues declining by about 15%. This would result in reported EBITDA margins declining to the low 20% range and debt-to-EBITDA leverage growing to 12x (Moody’s adjusted) or over 17x on a reported basis by the end of 2009. Based on these assumptions, it appears that
Clear Channel will likely be in violation of its secured debt leverage covenants in 2009,” the Moody’s statement explained.
“With a capital structure that was highly speculative from its inception, the company’s ability to continue as a going concern is completely dependant upon remaining in compliance with its covenants. But in the current economic environment, compliance will be very challenging, and as a result, such a capital structure will not likely be sustainable,” stated Neil Begley, Senior Vice President of Moody’s Investors Service.
“We believe that there are three possible scenarios, with the highest probability associated with the first two which reflect a covenant breach, and both leading to certain debt restructuring. The first consists of the senior secured bank debt holders forcing an immediate restructuring to eliminate additional capital leakage to fund over $320 million of annual junior debt holder cash interest repayments as well as about $384 million of junior debt maturities in 2010. This scenario would result in a restructuring while the company still has a large cash balance (in our view, the $500 million May 2009 debt maturity is likely to be repaid before a covenant breach, with proceeds from the delayed draw secured term loan facility), and recovery for the senior secured debt would be greater before the cash balance declines and junior debt maturities are repaid.
The second scenario consists of the company successfully receiving a waiver of its covenant breach or covenant relief via an amendment. In our view, the company would likely be given only limited relief of the covenant and could require a second request within a few quarters. Moody’s believes that there would be a significant cash fee paid to the banks, and an upward adjustment in the borrowing rate on the first amendment request, as well as on subsequent requests. We estimate that in this scenario, the company would burn through nearly $400 million of cash before the impact of the higher interest cost, which could reduce 2009 year end cash to under $1.5 billion. In addition, based on our assumption of flat revenues in 2010, significantly higher interest costs, negative cash flow of nearly $800 million, and about $400 million in debt maturities (we assume that the company no longer has access to the delayed draw term loan for the residual $134 million third quarter maturity), the company would end 2010 with under $300 million in cash and face over $1 billion of debt maturities in 2011. In our opinion, this would be too much for the company to overcome without a robust recovery which would need to almost double 2010 EBITDA in order to meet the company’s cash needs, which we believe unlikely.
The third scenario, with a low probability of occurring, in our view, assumes that the company does not violate its bank agreement covenant, which would require the company to have a total revenue decline under 15% in 2009, flat or growing revenues in 2010, and a certain recovery in 2011. Though the company still faces nearly $3 billion of debt maturities through 2013 (net of $633 million of repayments from the company’s committed delayed draw term loan facility), it should have sufficient cash to meet these maturities. However, 2014 maturities are very significant and would likely require the company to possess materially lower leverage in order to be able to refinance them,” Moody’s said.
RBR/TVBR observation: Clear Channel has been aggressively managing its finances because of the tough economy. As we noted when the company drew the remaining $1.6 billion of its credit line, it is better to have the cash in hand as credit gets ever tighter. With $23 billion in total debt, Clear Channel’s debt load is so large that it actually has the upper hand in dealing with its banks, who really don’t want to force massive asset sales in a down market for radio stations.