Moody's turns positive on Nexstar debt ratings outlook


Moody’s Investors Service revised the outlook of Nexstar Finance Holdings Inc., a subsidiary of Nexstar Broadcasting,  to positive from stable. Nexstar has approximately $600 million of debt rated by Moody’s.

In addition to the outlook action, Moody’s also affirmed its B3 corporate family and probability of default ratings, as well as its SGL-2 Speculative Grade Liquidity Rating and the Ba3 rating on its first lien credit facility. Nexstar has proposed a $50 million increase in its first lien term loan with proceeds to be applied to repayment of the 11.375% Senior Notes due April 2013.

Moody’s noted that Nexstar also announced plans to acquire two TV stations from Liberty Media Corporation for approximately $20 million, to be funded with $2.5 million of equity and $17.5 million of borrowings under its revolving credit facility.

The outlook change by Moody’s incorporates expectations that the company will continue to apply the free cash flow generated from its strong performance to permanent debt reduction. Also, the proposed transaction would modestly lower interest expense through the replacement of higher cost debt with lower cost debt, the ratings agency noted.

“Nexstar’s B3 corporate family rating incorporates its high, albeit improved, leverage (approximately 7.3 times on a debt-to-two year average EBITDA basis, just under 6 times based on 2010 results), which poses challenge for managing a business vulnerable to advertising spending cycles. Furthermore, we believe broadcasters continue to face pressure from media fragmentation and that, over time, higher programming expenses could pressure EBITDA margins. Nevertheless, Moody’s anticipates Nexstar will continue to use some of its strong free cash flow to permanently repay debt and to improve its capital structure to better withstand  volatility from both election and economic cycles as well as secular pressure. Good margins and unlevered cash flow generation created by Nexstar’s diverse geographic footprint, continued local market focus, and leading audience share in many markets support the rating. Nexstar’s rating also benefits from its diverse network affiliations and local marketing agreement (LMA) with Mission Broadcasting, which expands programming coverage and cost efficiencies,” Moody’s said in its analysis.

“The positive outlook reflects the potential for an upgrade with continued strong performance and commitment to improvement of the credit profile,” Moody’s said. “Moody’s would consider an upgrade with expectations for absolute debt reduction to a level comfortably below $600 million (assuming the current asset base). To achieve a B1 corporate family rating would also require expectations for sustained leverage below 6 times debt-to-EBITDA on a two year average basis, positive free cash flow in excess of 5% of debt, and continued commitment to maintaining a strong credit profile.”

However, it added, “The outlook could revert to stable should performance fall short of expectations such that we anticipated leverage would remain above 6 times debt-to-EBITDA, or if management applies cash to shareholder returns rather than debt reduction. A deterioration in liquidity, negative free cash flow, or expectations for leverage above 8 times on a two year average basis could warrant a downgrade.”

Here is a summary of the ratings actions:

Nexstar Finance Holdings, Inc.

….Outlook, Changed To Positive From Stable

….Affirmed B3 Corporate Family Rating

….Affirmed B3 Probability of Default Rating

….Affirmed SGL-2 Speculative Grade Liquidity Rating

Nexstar Broadcasting, Inc.

….Senior Secured Bank Credit Facility, Affirmed Ba3, LGD adjusted to LGD2, 10%, from LGD1, 7%

….Senior Secured Regular Bonds, Affirmed B3, LGD adjusted to LGD4, 52% from LGD3, 45%

….Senior Subordinated Bonds, Affirmed Caa2, LGD adjusted to LGD5, 88% from LGD5, 84%

Mission Broadcasting, Inc.

….Senior Secured Bank Credit Facility, Affirmed Ba3, LGD adjusted to LGD2, 10%, from LGD1, 7%