Six Questions with Carl Salas

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Carl Salas
Personal information
Current company: Moody’s Corporation
Position:  Vice President, Senior Credit Officer
Location:  Downtown Manhattan next to the Freedom Tower
Place of Birth: The Commonwealth of Massachusetts (home of the bean and the cod)
Date of Birth: Let’s just say, I can recall my early broadcast experiences as a child watching the Ed Sullivan Show in black and white with my parents and siblings in the family room.
Spouse/Kids/Personal info:  My wife, Sandra, is in equity investment management.  After I met Sandra and I was still a banker, we attended the same investor conferences.  My daughter Christina (age 10) and son Nicolas (age 8) are avid sports fans.
College:  Dartmouth College
Graduate School:  Columbia University
Favorite band or artist: Not surprisingly, “Boston”
Favorite movies: I enjoy movies and can put my favorites in categories.  From a broadcast perspective, “Groundhog Day” stands out as the film explores an existential dilemma for a television weatherman.  “Working Girl” also has broadcast ties in a Wall Street setting.  If I recall correctly, the climax is reached when Melanie Griffith’s character, Tess, saves the day by recommending her corporate client acquire a radio station group.  In this way, she prevents a hostile takeover by an international corporate raider given the FCC restrictions on foreign ownership.
Favorite books:  “The Fountainhead” is a classic read.  My wife just finished “Atlas Shrugged” and we compare notes on how some of the social themes in these two books written by Ayn Rand more than 50 years ago may be applicable today.
Sports Team Preferences: Although I have lived in Manhattan for all but a couple of years since the early 1990’s, my favorite teams are unchanged:  Bruins, Celtics, Patriots, Red Sox.  Clearly my loyalties were rewarded when the Red Sox came back from being down 0-3 in the 2004 playoffs against the Yankees and went on to win the World Series.
Hobbies/Passions: Running, surfing, tennis, and walks in Central Park (increasingly with my children)
Causes/Charities:  I give a lot of credit to The Moody’s Foundation for providing opportunities to actively support charities.  Similar to family members of my parent’s generation, I served in the military so causes supporting veterans and active duty military are important to me.  These individuals do a large part to preserve the freedom we enjoy today.  I recently participated in an effort supporting a nearby animal shelter.


Questions:

1. How did you get started in the business?
I decided to become a banker right out of business school.  My intent was to work with biotechnology and high tech companies to take advantage of my undergraduate degree and internship experiences; however, I was advised back in the late 1980’s that if I wanted to see a lot of deal flow I should work with media companies.  My first transactions involved highly leveraged broadcasters who were opportunistically refinancing their Drexel junk bonds at steep discounts.  My experience in the late 1980’s would help prepare me for what would happen years later when companies would leverage their balances sheets again.  In 2003, I transitioned to the corporate side as Treasurer, then CFO, and vividly recall issuing new bonds and needing to present to the rating agencies, including Moody’s.  I was fortunate to be offered a position as an analyst in the Media group of Moody’s a few years ago as I get to work with a number of sectors including broadcasting which I have seen ev olve over the past 25 years.

2. To start, may we have a primer on what it takes to earn Moody’s outlooks of positive, stable and negative?
Generally speaking, a company that Moody’s rates will earn a positive outlook if we believe operating performance and financial metrics are improving to the point that we could potentially upgrade a company’s debt ratings in the next 12 months.  Keep in mind that for broadcasters we measure performance over two consecutive years given the expected revenue swings during the political cycle.  We consider a company to have a stable outlook if we believe operating performance and financial credit metrics will largely remain within a range appropriate for the company’s current debt ratings.  As a reference point, most of the broadcasters we currently rate have a stable outlook.  Finally, we will consider a company to have a negative outlook if we believe operating performance or financial metrics are deteriorating to the point that we could downgrade a company’s debt ratings in the next 12 months.

3. To continue on that tack, what is a healthy leverage level, at what point does it begin to be unhealthy, and what are the dangers of exceeding it?
Leverage is healthy when debt balances are kept at acceptable levels so that cash flow generated by operations is more than sufficient to cover interest expense and scheduled principal repayments even during an unexpected downturn in the economy or when stations in one or more key markets underperform.  Taking on reasonable levels of debt to fund an opportunistic acquisition is all right so long as an operator sticks to the plan to bring leverage back to prior levels in a reasonable time frame.

Leverage reaches a point of being unhealthy when a greater percentage of cash flow is diverted to fund interest expense leaving much less for investing in growth or building up financial capacity for opportunistic acquisitions.

The dangers of exceeding healthy leverage levels were demonstrated when I started in the business in the late 1980’s and more recently during the Great Recession.  When advertising demand softened, broadcasters that took on too much leverage were no longer able to generate sufficient cash flow to cover their debt service.  As you would expect, some operators needed to sell assets to satisfy debt obligations or to bring their leverage back to healthier levels.  Other companies changed ownership as they restructured their balance sheets, sometimes in bankruptcy.

4. In your estimation, how are companies currently balancing the ability to control their own destiny and their vulnerability to overall economic conditions? 
The current balance is healthier than it was a few years ago when we saw a shakeout after the 2008-2009 downturn.  Generally speaking, operators who survived did so because they were less leveraged and better positioned to have more control over their destiny.  Over the last three years, debt ratings for broadcasters have generally improved with rating upgrades outnumbering downgrades. Improved ratings suggest that broadcasters are less vulnerable and are better positioned to withstand changes in overall economic conditions.  Today’s television and radio broadcasters reflect a healthier financial balance as they are better capitalized with lower leverage and greater revenue diversification across core advertising, digital, political, or retransmission revenue streams as well as from their larger scale with more locations.

5. What trends do you see for the broadcasting industry as a whole, and for television and radio separately?
Media fragmentation is a challenge that affects the broadcasting industry as a whole. Given the early stages of competing digital advertising, these newer media businesses are enjoying double digit percentage top line growth.

For television, we see low single digit percentage growth trends in core advertising revenues supplemented by higher growth for political advertising in even numbered election years.  Broadcasters’ success in delivering an effective message efficiently to a wide audience is clearly demonstrated by the robust demand for political advertising.  We also see broadcasters’ digital operations sharing the benefits of double digit revenue growth and making a bigger impact on cash flow.  Absent unexpected disruptive technologies, we believe retransmission revenue growth trends will continue and narrow the pricing gap related to the higher rates distributors pay for comparable cable network programming.

For radio we see slower overall growth trends over the next 12 months than for television.   We believe operators will take advantage of M&A opportunities and asset swaps to further optimize their station portfolios by market size and geography.  Broadcasters will add to their investments in digital audio services to complement their traditional offerings as they position themselves to take advantage of the evolution of audio entertainment at home, in the connected dashboard, or on mobile radio.

To succeed in an increasingly fragmented ecosystem, broadcasters will continue to brand themselves as the premier local media provider regardless of the distribution method.  Adding to the increasingly dynamic revenue mix for broadcasters are the evolving approaches that viewership and listenership will be measured and how the new metrics will translate into ad pricing.  The demographics of the U.S. population are also changing.  Broadcasters with exposure to the Spanish language audiences are positioned to realize higher top line growth.  Imagine how I could have benefited if “Topo Gigio”, the puppet on the Ed Sullivan Show, spoke Spanish instead of Italian.

6. What are your observations on the M&A activity we’ve seen this year, and where do you expect it to go in the next 12 months?
Clearly M&A activity in broadcasting, particularly television, has been significant and is keeping everyone busy.  We are seeing longstanding, closely held broadcasters invest in acquisitions or decide to be acquired as the industry pursues the benefits of larger scale.  We believe M&A will remain active for the next 12 months.  As some of the larger transactions close after receiving FCC approval, we expect to see more moderate sized transactions and asset swaps as television and radio operators work with each other to optimize their station holdings.  The upcoming FCC meeting will be interesting to follow given the potential discussions regarding ownership rules including attribution.