The tender offer for some of its bonds that Clear Channel completed last week is paying off. Standard & Poors has now raised the company’s corporate rating out of the gutter due to the successful tender.
There was some confusion Monday as an obscure financial website (that we’d never heard of before) ran a story claiming that S&P had downgraded Clear Channel Communications and parent CC Media Holdings to “SD” (selective default) from “CCC” (still a pretty low rating). That would not be possible, since the rating had already been SD. So, the actual announcement yesterday was quite the opposite.
To set the record straight, here, in its entirety, is the rating announcement from S&P:
“Clear Channel Rating Raised to ‘CCC’ from ‘SD’ After Completion Of Tender Offer
-Clear Channel completed a cash tender offer for $412.1 million of aggregate principal amount of five senior notes maturing between 2011 and 2014, which begins to address intermediate-term liquidity concerns.
-We are raising our corporate credit rating on the company to ‘CCC’ from ‘SD’ (selective default).
-The negative rating outlook reflects narrowing covenant compliance in the second half of the year if operating trends don’t improve, and sizable intermediate-term maturities despite the recent tender offers.
NEW YORK (Standard & Poor’s) Aug. 31, 2009 – Standard & Poor’s Ratings Services today raised its corporate credit rating on CC Media Holdings Inc. and its operating subsidiary, Clear Channel Communications Inc., to ‘CCC’ from ‘SD’. The rating outlook is negative.
In addition, we raised the issue-level rating on the participating Clear Channel notes to ‘CC’ from ‘D’.
“The rating upgrade follows our review of Clear Channel’s business and financial outlook following its cash tender for $412.1 million aggregate principal of five senior note issues maturing between 2011 and 2014 at discounts to par in the area of 30% to 50%,” said Standard & Poor’s recovery analyst Michael Altberg.
The total consideration paid, including accrued interest, was roughly $156.7 million, which was funded with cash on hand. Pro forma for the transaction, cash balances stood at $1.34 billion as of June 30, 2009.
We acknowledge that the transaction begins to address liquidity concerns and reduces Clear Channel’s intermediate-term debt balances, which we believe represent significant refinancing risk in the current economic and credit conditions. Maturities are still sizable over the next few years, at $1.4 billion between 2011 and 2013. Over the near term, we are also concerned about potential covenant violations, giving ongoing weak performance at the radio and outdoor segments.
In the second quarter of 2009, revenue and EBITDA (excluding merger related expenses and noncash impairment charges) declined 21.5% and 41%, respectively. Radio revenue declined 19.5%, while outdoor revenue was down a sizable 24.3%, led by a 29% decline at the international segment, which was negatively affected by foreign exchange movements.
As of June 30, 2009, leverage per lenders’ calculations was 8.1x (up from 7.1x at March 31), versus a 9.5x covenant. Pro forma for the cash tender offers, we estimate that leverage for covenant purposes increased marginally to 8.2x, as roughly $156.7 million of cash was consumed in the tender transaction. Since the leverage covenant is calculated by netting available cash from secured debt, a key factor for covenant compliance is the company’s rate of cash consumption over the remainder of the year. Holding pro forma June 30 cash balances constant (and including our assumptions on EBITDA add-backs under the credit agreement), we estimate that the company could breach covenants at Dec. 31, 2009 if EBITDA declines by about 32% or 33% in the second half of the year.
The company does face easier comparisons in the fourth quarter, as EBITDA declined about 50% in the fourth quarter of 2008. Still, covenant compliance, in our view, hinges on prospects for economic and company-specific recovery in the second half of the year. In addition, consumption of cash balances due to negative discretionary cash flow would further affect covenant cushion.
Discretionary cash flow was negative $176.6 million over the first six months of 2009, although second-quarter discretionary cash flow was relatively breakeven. (For additional company and covenant analysis, see “Credit FAQ: Clear Channel’s Near-Term Prospects Amid Recessionary Pressure”, published July 30, 2009, on RatingsDirect.)”