S&P knocks Clear Channel down two notches


Citing “negative secular trends at Clear Channel’s radio sector,” Standard & Poor’s has cut the company’s debt rating two notches to CCC. S&P says the outlook is “negative” and warns of a possible financial covenant breach late this year.

CC Media Holdings, the parent company, and Clear Channel Communications, the operating subsidiary, had already been in junk bond territory, but the move by S&P pushed their debt ratings even lower.

“The ratings downgrade is due to uncertainty around Clear Channel’s ability to meet financial covenants in the second half of 2009 without completing a debt exchange with senior lenders,” explained Standard & Poor’s credit analyst Michael Altberg.

“If senior secured lenders agree to the company’s proposed debt exchange, we would lower our corporate credit rating to ‘SD’ (selective default) and then reevaluate the post-transaction capital structure. If Clear Channel is unable to complete a potential debt exchange, we are concerned that it could violate financial covenants and would be unable to absorb a potential interest rate increase that could accompany an amendment, forcing it into bankruptcy,” S&P said in its ratings announcement.

S&P sees the possibility of a loan covenant default in late 2009 if economic conditions don’t improve. It notes that cyclical pressure on advertising revenues in both radio and outdoor are expected to continue through 2009 and perhaps into 2010.

“For the first quarter of 2009, revenue and EBITDA (including restructuring charges) declined 22.7% and 56%, respectively. Radio revenue declined 21.6%, while outdoor revenue was down a sizable 25%. For the first half of 2009, the company faces more difficult year-over-year comparisons at its outdoor business, as this segment did not show the same level of weakness in local advertising as other media until the third quarter of 2008. The EBITDA margin was 23.7% for the 12 months ended March 31, 2009, down from 31.8% as of March 31, 2008, due to pressure on both ad pricing and volume in both radio and outdoor,” S&P noted.

Clear Channel declined to comment on the S&P ratings action.

RBR/TVBR observation: Right now, it’s all about survival. Clear Channel has to stay ahead of its debt covenants and maintain enough cash flow to make its debt payments. If it can do that until ad revenues improve, then the equity owners will eventually have some value return to their equity. Meanwhile, the vultures are circling and hoping the clock will run out before ad revenues build back up.