The already weak fundamentals for US broadcasters are getting worse, says Moody’s Investors Service, with loan covenant non-compliance likely and the prospect that the ratings agency will cut credit ratings for more broadcasters. As a group, it says television companies are in worse shape than their radio brethren.
“The already weak credit fundamentals for the US broadcast-TV industry are worsening as the global economic downturn sends television advertising revenues into a tailspin,” said Moody’s in a summary of its latest analysis.
“The economic weakness makes a bad situation worse for TV broadcasters, who entered this recession with high average debt leverage levels and continue a lengthy fight to retain viewers and ad dollars in the face of growing media fragmentation,” the ratings agency said. Overall, it is expecting a 15-20% decline in advertising revenues for 2009.
"Our main concern is the broadcasters’ weakening ability to comply with loan covenants, deteriorating liquidity positions and steep leverage," said Moody’s Senior Vice President Neil Begley.
Steep cyclical losses in ad revenues because of the recession, compounded by the typical off-year loss of political and Olympic ad revenues in 2009, are likely to increase pressure on broadcasters’ cash flow at the worst possible time – in the midst of a credit crisis. "This, combined with the high fixed costs of running a TV station, puts many issuers at risk of default," said Begley.
Thus, Moody’s says many broadcasters face the prospect of having their ratings lowered further if industry conditions deteriorate more than expected, or if, in some cases, their cash flow and cash on hand evaporate faster than expected.
In all, about 14 out of 16 rated pure-play TV station broadcasters have been downgraded since July 2008, according to Moody’s.
"Rating actions depend on the degree of credit risk a company faces," says Begley. "We consider its capital structure, revenue diversification and its relative exposure to troubled industries, like automakers which have historically represented an average of about 25% of TV station ad revenues, as well as the strength of a station’s market size and competitive position, among other factors."
Thus, he noted, companies with cash-rich parents and relatively low leverage, such as Hearst-Argyle Television Inc. (senior unsecured debt rated Baa3), are in a “somewhat more tenable position.”.
“However, as conditions in the economy and capital markets play out, a stronger-than-expected economic downturn could catch up with even the higher-rated broadcasters unless they are extremely prudent in managing their operating strategy, costs, and cash and liquidity positions,” the Moody’s statement warned.