Radio and television companies are facing another round of potential, if not likely credit rating reductions by Moody’s Investors Service. “Moody’s expects rated issuers will face significant revenue and cash flow deterioration over the next 12 to 18 months due to the high probability of contraction in the US economy and its impact on advertising revenue,” the ratings agency warned.
The key quote: “Moody’s now believes there is a high probability that broadcast station industry revenue will decline by more than the cyclicality built into existing ratings – by as much as 15-20% on average for the industry in 2009.”
There have been concerns about broadcast debt ratings for some time. Moody’s revised its outlook for the US broadcast TV industry to negative from stable in July and its outlook for the US radio broadcasting sector has been negative since late last year.
Here is the worrisome commentary from Moody’s:
“Broadcasters derive the majority of their revenue from cyclical advertising. Annual television station revenue performance is additionally affected by the timing of the Olympics and elections. TV Broadcast station revenue would likely be down in 2009 by mid single digits because of the absence of these latter events even in a stable economic climate. Over the last several quarters, Moody’s has factored into ratings a somewhat larger decline in 2009 broadcast station revenue to reflect the effect of a moderate cyclical slowdown. However, Moody’s concern has deepened due to even weaker economic trends amid signs of growing unemployment, depressed consumer confidence, and sharply lower credit availability, all on top of already anemic broadcast station operating performance. Moody’s now believes there is a high probability that broadcast station industry revenue will decline by more than the cyclicality built into existing ratings – by as much as 15-20% on average for the industry in 2009 (taking into consideration that 2009 will not benefit from political advertising). Moody’s will evaluate whether issuers have the liquidity to get through the cycle and identify instances where existing ratings do not adequately factor in the degree of cyclicality expected over the next 12 to 18 months.
The housing market crisis, high energy and food prices, increasing unemployment, and reductions in credit availability are contributing to low consumer confidence and increasing the risk of a slowdown in consumer spending. Lower consumer spending is typically linked to lower return on advertising spending and weakening corporate profits – prompting cut backs in marketing and advertising spend that will further pressure the advertising revenue on which broadcasters rely. Several industries have already sharply scaled back such budgets over the past several quarters in response to these forces.
The primarily fixed cost base offers operators few cost reduction levers to pull to offset declining revenues from advertising as the economy weakens. As a result, the operating cash flow and the fundamental credit profiles of broadcasters could weaken more dramatically than typical for other cyclical industries.
The combination of high debt leverage, weakened cash flow and covenant step-downs could create tight liquidity situations for many speculative-grade rated broadcast issuers. Furthermore, recent negative events in the US financial markets and their impact on the availability of credit will likely compound these liquidity challenges, reducing access to capital markets that broadcasters would otherwise have relied upon to refinance debt or provide funding to tide them over through the cycle, and hampering their ability to remedy potential or actual covenant problems.
Conditions are clearly challenging for the broadcast sector, and the impact and prospects will vary by issuer. While a number of broadcast ratings were adjusted over the past year, Moody’s warns that many issuers face the prospect of having their ratings lowered further and possibly, in some cases, by multiple notches.”
RBR/TVBR observation: The lucky ones are the companies who don’t have to refinance or raise new cash in the coming months. Even so, though, many of them have to keep an eye on loan covenants so they don’t trip any. So, buy your CFO an extra case of Maalox.