Moody’s Investors Service has placed $23 billion of debt at Clear Channel Communications under review for a possible downgrade. The rating agency says it is concerned that 2009 radio revenues will turn out to be lower than expected and lead to a breach of financial covenants. Moody’s had already factored in a 10-15% decline in radio revenues for this year, but now worries that pacings are down more than 20%.
Here’s the analysis from Moody’s:
“Moody’s Investors Service has placed Clear Channel Communications, Inc. ("Clear Channel") (B2 CFR) credit ratings under review for possible downgrade. The rating action reflects Moody’s concern that radio revenues in 2009 will turn out to be lower than expected and the company’s cash flow could decline to levels that would weaken credit metrics and cause a breach of financial covenants. Moody’s had anticipated between 10 and 15% revenues declines from the company’s radio and outdoor business in 2009, however, radio industry revenues broadly appear to be pacing down in excess of 20% through January, and outdoor revenues appear to be trending worse than anticipated, particularly international revenues which are being adversely impacted by foreign exchange movements in addition to economic weakness.
Moody’s review will focus on the potential depth of the advertising market downturn relative to our previous expectations where we believed that the company would maintain covenant compliance through 2009. Moody’s will consider Clear Channel’s ability to navigate though this difficult operating environment through its cost cutting efforts, and the effect revenue declines of as much 20% will have on the company’s EBITDA and credit metrics, particularly debt-to-EBITDA leverage and interest coverage. We will consider the extent to which the company’s near-term cash liquidity will be affected by the company’s election to PIK interest on its $1.3 billion of senior toggle notes. The key focus of the review will be on Clear Channel’s ability to remain in compliance with its secured leverage covenant (which remains at 9.5x through the first quarter of 2013) over the coming 12 months, and if it is unable to comply with the covenant, the impact on its credit profile of likely higher interest costs, and the extent to which any increased restrictions imposed on the company by its bank creditors would increase the probability of a default.
Ratings affected by the review are:
Issuer: Clear Channel Communications, Inc.
Corporate Family Rating — B2
Probability of Default Rating — B2
Senior Secured Revolving Facility — B1 (LGD 3, 33%)
Senior Secured Tranche A Term Loan Facility — B1 (LGD 3, 33%)
Senior Secured Tranche B Term Loan Facility — B1 (LGD 3, 33%)
Senior Secured Tranche C Term Loan Facility — B1 (LGD 3, 33%)
Senior Secured Delayed Draw Term Loan 1 Facility — B1 (LGD 3, 33%)
Senior Secured Delayed Draw Term Loan 2 Facility — B1 (LGD 3, 33%)
Senior Cash Pay Notes due 2016 — Caa1 (LGD 5, 79%)
Senior Toggle Notes due 2016 — Caa1 (LGD 5, 79%)
Senior Unsecured Bonds — Caa1 (LGD 6, 91%)
Outlook, changed to rating under review from stable.
The last rating action was on July 30, 2008 when Moody’s assigned a B2 CFR and affirmed Clear Channel’s speculative grade liquidity rating of SGL-2. The outlook was stable.”