The move by Moody’s Investors Service to downgrade its probability of default rating for Regent Communications is hardly surprising given the recent interest penalty imposed by Bank of America. However, the ratings agency says its assessment of Regent’s creditworthiness could move up or down, depending on the outcome of its ongoing negotiations with its lenders.
Moody’s Investors Service said it downgraded the probability of default rating of Regent Broadcasting LLC (Regent) to Caa2 from Caa1 and its corporate family rating to Caa1 from B3 “based on intensifying default risk.” But going forward, Moody’s also changed the outlook to developing, “indicating the potential for ratings to move either up or down depending on the outcome of ongoing lender discussions.”
“Default risk has risen with the passage of time and Regent’s lack of evident progress in achieving an amendment to its financial covenants, which the company is likely to breach in 2009. Furthermore, this potential inability to comply with its financial covenants triggered going concern language in its 2008 form 10-K, constituting an event of default under Regent’s credit agreement. Lenders sent a notice of default to the company, and the 30-day period for remedying it has elapsed,” Moody’s noted.
“Regent lacks sufficient liquidity to fund repayment of the approximately $195 million of loans should lenders exercise their legal rights to accelerate payment of the full outstanding balance,” Moody’s added. “However, the company continues to generate positive free cash flow despite the challenging climate for radio advertising and also to perform better than many of its peers, which should enhance its position in negotiating with its lenders. The one notch gap between the Caa1 CFR and the Caa2 PDR indicates the potential for an above average recovery should a restructuring occur, and Regent’s underlying cash flow generation and relatively moderate leverage profile support this assumption.”
Moody’s said it will continue to evaluate Regent’s ability to achieve a bank amendment that creates a greater cushion of covenant compliance and provides access to its $75 million revolving credit facility, “as well as the impact of the related costs (both upfront and ongoing in the form of higher interest) on Regent’s ability to generate free cash flow.”
What would it take for Regent’s credit ratings to move up? “Success in achieving an amendment that facilitates continued positive free cash flow and provides adequate cushion under covenants could yield positive ratings momentum. Conversely, inability to achieve a viable amendment could result in a multi-notch downgrade,” Moody’s said.
Here are the latest ratings actions taken by Moody’s:
Regent Broadcasting LLC
….Probability of Default Rating, Downgraded to Caa2 from Caa1
….Corporate Family Rating, Downgraded to Caa1 from B3
….Senior Secured Bank Credit Facility, Downgraded to Caa1, LGD3, 35% from B3, LGD3, 35%
….Outlook, Changed To Developing From Rating Under Review