Although its Q3 revenues were down, Spanish Broadcasting System (SBS) has gotten some good news from Moody’s Investors Service – a ratings upgrade for its $400 million of rated debt.
Moody’s Investors Service upgraded the corporate family and probability of default ratings for SBS to Caa1 from Caa3. The ratings agency said the action was based on improved free cash flow prospects due to better than anticipated cost cutting and the expiration of an unprofitable interest rate swap agreement. “The better free cash flow and the substantial balance sheet cash (approximately $52 million as of September 30, 2010) enhance refinancing prospects. Nevertheless, the June 2012 maturity of the company’s term loan poses risk given the company’s high leverage (approximately 9.7 times debt-to-EBITDA as per Moody’s standard adjustments including the preferred stock as debt, but in the mid 7 times range excluding it) and weak growth prospects,” Moody’s said.
Here is what Moody’s had to say of its ratings rationale:
“Spanish Broadcasting’s Caa1 corporate family rating incorporates its weak capital structure, operational pressure in the still cyclically weak economic climate, generally narrow growth prospects (though Spanish language is the strongest growth prospect) given the maturity and competitive pressures in the radio industry, and the June 2012 maturity of its term loan magnify this challenge. Furthermore, the company’s TV initiative continues to drain its radio cash flow and pressure the consolidated EBITDA margin, although cost reductions throughout 2008 and 2009 brought margins to the low 30% range, more in line with peers.
However, the significant revenue declines in the June and September 2010 quarters raise some concern that cost cuts have damaged the programming and / or the company’s ad sales capability. Geographic concentration and lack of scale also constrain the rating. Expectations for continued positive free cash flow, along with Spanish Broadcasting’s large market presence and favorable growth rates for the Hispanic media market and positive Hispanic demographic trends, support the rating.
The stable outlook incorporates our expectations that Spanish Broadcasting will continue to generate positive free cash flow and will reduce leverage modestly from the current level of close to 10 times debt-to-EBITDA (including the preferred stock, in the mid 7 times excluding it).
The June 2012 maturity, high leverage and weak near-term growth prospects limit upward ratings momentum. However, we could consider a positive rating action with an extension of maturities, revenue stability in the radio segment, and progress towards profitability for the TV segment.
Continued radio revenue declines in excess of 5%, inability to generate positive free cash flow, or lack of progress on addressing refinancing needs by the end of 2011 could result in a negative ratings action.”
Here are the ratings actions taken by Moody’s:
Spanish Broadcasting System, Inc.
….Corporate Family Rating, Upgraded to Caa1 from Caa3
….Probability of Default Rating, Upgraded to Caa1 from Caa3
….Senior Secured Bank Credit Facility, Upgraded to Caa1, LGD4, 50% from Caa3, LGD4, 50%
….Preferred Stock Upgraded to Caa3, LGD6, 99% from C, LGD6, 99%
….Outlook, Changed To Stable From Negative