With Salem Communications announcing plans to refinance all of its long-term debt, Moody’s Investors Service has put the company’s debt rating under review for a possible upgrade. It has tentatively assigned a B2 rating to the new bond offering, which is a step better than the B3 corporate family rating that is now up for review.
“The review reflects Moody’s increased level of confidence that improved credit market conditions will allow the company to access markets on sufficiently economic terms to address its near-term liquidity needs and retire at par all of Salem Holdings’ existing $321 million of debt, which debt would otherwise mature over the next year. Moody’s believes the refinancing would significantly improve the company’s liquidity position and this drives the review. The existing CFR and PDR factors in some potential that the company would be unable to meet its refinancing needs or would need to retire existing debt at a discount in a transaction that would have been considered a distressed exchange. The Caa2 rating on the existing 2010 senior subordinated notes is not covered by the review. This rating, along with the CFR and PDR, would remain unchanged or potentially be lowered further if the proposed refinancing does not occur and the company is unable to address its refinancing needs in a timely manner. Moody’s will withdraw the ratings on the existing subordinated notes if they are substantially repaid in conjunction with the proposed tender offer or otherwise retired (such as via Salem Holdings’ December 15, 2010 call option at par),” Moody’s stated.
“The (P)B2 rating on the proposed second lien notes are based on Moody’s expectation that Salem’s CFR and PDR will be upgraded to B2 if the refinancing closes in accordance with the proposed terms,” it added.
“The prospective B2 CFR and stable rating outlook reflects the company’s strong market position in Christian teaching and talk radio and good liquidity position, tempered by high leverage (approximately 5.8x LTM 9/30/09 debt-to-EBITDA pro forma for the transaction and incorporating Moody’s standard adjustments), small scale, reliance on the mature radio industry, and exposure to cyclical changes in client spending. Salem benefits from the revenue it receives from block programmers. This business does not rely materially on advertising spending and fluctuates less with economic conditions, facilitating less revenue volatility than traditional radio broadcasters. Not-for-profit entities comprise the majority of block programming clients and are driven by donations and other forms of fundraising. These funding sources can exhibit cyclical volatility, but block programming generally has very high annual renewal rates (exceeding 90%) and is driven by longer-term factors such as maintaining audience to sustain a donor pool. The station portfolio is largely in top 25 markets with a broad geographic footprint, but the top two markets (Los Angeles, and Dallas) account for approximately 35% of revenue. Salem has a very strong and leading position in the niche religious format, with limited direct competition for similar programming, although the company competes for consumer time and attention with a wide variety of news and information providers and leisure activities,” the ratings agency said.
“Moody’s anticipates that cash interest costs will increase significantly as a result of the transaction and this will weaken free cash flow conversion and interest coverage. The prospective increase in the CFR reflects that the cash interest expense increase is less than anticipated in the B3 CFR and would be completed without a transaction considered a distressed exchange,” Moody’s concluded.