Moody’s worried about radio


Citing worries about “significant revenue and cash flow deterioration” for the radio sector, Moody’s Investor Service has placed the credit ratings of three radio companies on review for possible downgrade. The review applies to Emmis, Salem and Cumulus Media Partners, but the concerns that Moody’s has could be applied to other radio companies as well.

“Today’s rating actions were prompted by our heightened concerns that the radio broadcasting sector will face significant revenue and cash flow deterioration due to the high probability of further deterioration in the U.S. economy and its impact on advertising revenue,” the ratings agency said.

“Moody’s expects radio broadcasting revenues, which are highly reliant on cyclical advertising, to come under increasing pressure due to the slowdown in consumer spending, its impact on corporate profits and the resulting cutbacks in advertising and marketing budgets by several industries. Moody’s notes that the primarily fixed cost base of most radio broadcasting companies offers limited avenues to reduce costs in a downturn. As a result, risks associated with sharp revenue declines due to curtailments in advertising budgets appear to far outweigh any potential benefits from cost cuts implemented to mitigate the pressure,” Moody’s continued.

“Moody’s expects the resultant cash flow declines to erode headroom under financial maintenance covenants (especially when step-downs occur) and cause liquidity pressure. While the sale of assets can provide broadcasters with additional liquidity, in our view, a sale of stations may be difficult and may take longer due to the current adverse credit environment and lack of financing availability. Reduced access to capital markets will also make it challenging for companies to refinance debt, raise additional funding and remedy covenant (actual or potential) problems,” the statement said.

Regarding the three companies:

–Cumulus Media Partners: “Moody’s decision to review CMP’s ratings reflects the company’s high debt-to-EBITDA leverage (9.8x at 6/30/2008 incorporating Moody’s standard adjustments) and weak operating performance, partly due to its presence in large markets, some of which have witnessed double digit revenue declines. Additionally, Moody’s remains concerned about the company’s ability to remain in compliance with its financial maintenance covenants in the face of the cyclical pressure on revenue and cash flow.”

–Emmis Communications: “The review for downgrade reflects continued weakness in Emmis’ revenue performance (both domestic radio and publishing) due to a weak advertising climate and internal operating challenges, which has contributed to weaker than expected credit metrics. Moody’s also remains concerned about the limited cushion under the company’s financial maintenance covenants and its ability to remain in compliance when the covenant step-down occurs in May 2009. Moody’s does however note the company’s recent efforts in managing costs to meet covenants and the company’s $68 million cash balance as of 8/31/2008.”

–Salem Communications: “The review for downgrade was prompted by the impact of the downturn in the economy on Salem’s operating performance, the possibility of inadequate cushion under the company’s financial covenants in the coming months and the refinancing risk associated with its revolving credit facility maturing in March 2009 given the current adverse credit environment. Moody’s review will focus on the company’s plan to refinance the revolver and the impact of the weak advertising climate on its operating performance and credit metrics.”