S&P worries about CBS


The long-term credit ratings of CBS Corporation have been placed on “CreditWatch” by Standard & Poor’s Ratings Services with an eye to a downgrade. That, after downgrading the company’s short-term ratings.

S&P is concerned about rising leverage ratios at CBS because of the impact of the tough advertising market.

“The CreditWatch listing of the long-term ratings reflects our expectation that fully adjusted leverage will rise meaningfully above our 4x threshold at the current rating level in 2009,” said Standard & Poor’s credit analyst Michael Altberg. “Our concern is most focused on local advertising weakness that has compounded adverse secular trends that have affected radio, TV, and outdoor advertising in various degrees. Our analysis also incorporates economic data available through early March on rising unemployment, record lows in consumer confidence and automotive sales, and our expectation of a GDP decline in 2009. Based on our macroeconomic concerns, we are now less confident that the company will bring leverage back below our 4x threshold in 2010,” he added.

As of December 31, 2008, fully adjusted leverage, which includes S&P’s adjustments for capitalized operating leases and minimum franchise payments associated with the outdoor advertising business, securitization debt (pro forma for the $300 million January paydown), guarantees, and tax-effected unfunded pension and retiree medical obligations, was 3.97x. S&P noted that eliminated any margin against the ratings firm’s 4x threshold for CBS at the ‘BBB’ rating level. Leverage was up from 3.47x as of December 31, 2007.

“Our baseline scenario in 2009, including our assumptions regarding cost cutting and retransmission consent revenue (and not assuming a fourth-quarter rebound in macroeconomic trends), indicates a decline in EBITDA in the 20% to 25% range, which would drive fully adjusted leverage to the high-4x area, notwithstanding the company’s reduction of its common dividend. Based on our assumptions of a restrained economic rebound in 2010 and moderate absolute debt reduction, we believe that fully adjusted leverage would remain over 4x in 2010. Under our downside scenario, which places greater stress on local advertising, even with cost cutting and retransmission consent revenue, EBITDA could decline in the 30% range in 2009, driving fully adjusted leverage well over 5x. We currently view this scenario as having a lower probability than our baseline case,” S&P said of possible scenarios for the future.

S&P announced that it had placed CBS Corporation’s long-term ratings on CreditWatch with “negative implications.” That includes the company’s BBB corporate credit rating.
At the same time, S&P lowered its short-term ratings on CBS to A-3 from A-2 and left these ratings on CreditWatch, where they were placed with negative implications on February 11, 2009.

S&P said its analysts will be meeting with CBS management to review Q1 results, look at market conditions for the TV Upfront and assess the company’s strategies for its debt maturities in 2010 – including the potential for leverage reductions – and to hear about management’s longer-term financial objectives.

“Our preliminary view is that a potential downgrade will be limited to one notch (to BBB-). A two-notch downgrade, which we currently view as a low probability, would involve indications of a much lower level of economic recovery in 2010 and unmitigated pressure from secular trends. Management has articulated a commitment to an investment-grade rating as providing optimum flexibility to meet its strategic objectives and shareholder-return agenda,” S&P said.

RBR/TVBR observation: Want a recession-proof business? How about credit ratings? S&P, Moody’s and Fitch all seem to be extremely busy these days. Lots of broadcasting companies have had to swallow downgrades from the ratings agencies. But it’s not just media – that’s the case for lots of companies in lots of sectors.