Moody’s Investors Service has finished its reviews of three more radio companies. You will not be surprised to learn that Citadel Broadcasting, Radio One and Salem Communications all saw their debt ratings downgraded. The companies still have significant free cash flow, but Moody’s worries that the slumping economy is going to drive up their leverage ratios.
The Moody’s downgrades cover about $2 billion of rated debt at Citadel, $1.3 billion at Radio One and $100 million at Salem. All three received a “negative” rating outlook, so they could face future downgrades as well.
Regarding Citadel Broadcasting:
“Moody’s Investors Service downgraded Citadel Broadcasting Corporation’s ("Citadel") Corporate Family Rating (CFR) to B3 from B1, Probability of Default rating to Caa1 from B1, and senior secured credit facility to B3 from B1. In addition, Moody’s lowered the company’s speculative grade liquidity rating to SGL-4 from SGL-3. The rating outlook is negative. This concludes Moody’s review that was initiated on August 21, 2008.
The rating downgrades reflect continued weakness in the company’s revenue and EBITDA due to a combination of the current weak environment, under-performance of Citadel stations in several markets and station re-format related weakness in some markets. Moody’s believes that Citadel’s operating performance will continue to face increasing pressure as a result of the slowdown in consumer spending, its impact on corporate profits, and the resulting cutbacks in advertising and marketing budgets by several industries. Moody’s notes that the company has applied its significant free cash flow to reduce debt and we expect the company will continue to do so over the rating horizon. However, we believe the on-going weakness in Citadel’s operating performance will not only preclude any reduction in the company’s debt-to-EBITDA leverage but will likely cause an increase in leverage.
Citadel’s SGL-4 speculative grade liquidity rating and negative rating outlook reflect Moody’s concerns over uncertainty regarding the company’s ability to remain in compliance with its credit facility’s total net leverage covenant, when considering the steps down in Q4 2008 and Q4 2009. In our view, absent a waiver/amendment from its lenders, the company could breach its covenant as early as Q1 2009. While the company’s significant free cash flow generation enhances the prospect that the company may receive a requisite waiver/amendment from its lenders, the current credit environment nevertheless heightens the risk associated with this not happening. Uncertainty with respect to any potential adjustment of the interest rate on the company’s bank debt should an amendment be required also raises the specter of a diminishing liquidity profile and further contributes to the ongoing negative rating outlook.”
Regarding Radio One:
“Moody’s Investors Service downgraded Radio One, Inc.’s ("Radio One") Corporate Family Rating to B3 from B2 and its Probability of Default rating to Caa1 from B2. In addition, Moody’s confirmed the Ba3 rating on the company’s senior secured bank credit facilities and downgraded its senior subordinated notes to Caa2 from Caa1. The rating outlook is negative. This concludes Moody’s review initiated on November 3, 2008.
The rating downgrades reflect Moody’s concerns regarding continued softness in the company’s operating performance and our belief that Radio One’s revenue, cash flow and credit metrics will likely deteriorate in the face of a further slowdown in the economy. Moody’s expects radio broadcast revenues, which are highly reliant on cyclical advertising, to come under increasing pressure due to the slowdown in consumer spending, its impact on corporate profits, and the resulting cutbacks in advertising and marketing budgets by several industries. Moody’s believes that Radio One’s revenue and cash flow could deteriorate such that debt-to-EBITDA leverage exceeds 9.0x over the next 12-to-18 months.
The negative outlook reflects Moody’s concerns regarding the company’s ability to remain in compliance with its financial maintenance covenants over the next twelve months, especially after the total leverage covenant steps down to 7.25x from 7.50x in Q4 2008. While we expect the company to generate positive free cash flow, that ability remains susceptible to likely increased pricing should the company require a covenant waiver and/or amendment.”
Regarding Salem Communications:
“Moody’s Investors Service downgraded Salem Communications Holding Corporation’s ("Salem") Corporate Family Rating ("CFR") to B2 from B1, Probability of Default Rating ("PDR") to B3 from B1 and downgraded its 7 ¾% Senior Subordinated Notes due 2010 to Caa1 from B3. The outlook is negative. This concludes Moody’s review initiated on October 15, 2008.
The downgrade reflects continued weakness in Salem’s national and local advertising revenue due to the current weak economic conditions and a pullback by several advertising categories including automotive and financial services. While the company’s block programming revenue has been relatively resilient (but not completely immune to the current downturn), Moody’s believes the company’s advertising revenue will continue to be pressured by the weak economy and advertising climate. As a result, Moody’s expects Salem’s cash flow will likely come under increasing pressure, cost cuts notwithstanding, such that debt-to-EBITDA leverage will not be sustained at a level commensurate with the former B1 rating.
Additionally, the downgrades and negative outlook also reflect Moody’s belief that the company’s covenant compliance cushion remains extremely thin and that the company will be challenged to comply with its financial covenants, particularly total debt-to-EBITDA leverage when the covenant steps down to 5.75x at 03/31/2009. Moody’s believes any potential covenant waiver/amendment is likely to result in increased pricing thereby further pressuring cash flow. In addition, Salem faces the upcoming maturity of its revolving credit facility in March 2009 and absent asset sale proceeds, will be solely reliant on mainly internal cash flow to fund its operating and debt service requirements. Notably, Salem also has significant refinancing needs over the intermediate term related to the 2010 maturity of its bank credit facility and senior subordinated notes.”
RBR/TVBR observation: Leverage is increasingly becoming a critical issue. Broadcasters, Citadel in particular, have been aggressively paying down debt with free cash flow, but slumping revenues still keep cutting EBITDA and increasing leverage. We wonder whether any traditional broadcasters will get to the point of doing what Sirius XM is now doing – swapping stock for bonds to reduce debt.