TEXT-S&P rates Clear Channel Communications notes
(The following statement was released by the rating agency)
-- Clear Channel Communications Inc., a subsidiary of CC Media Holdings Inc., has announced plans to issue $2 billion of priority guarantee notes due 2019 in exchange for $2 billion of its bank debt due in 2014 and 2016.
-- We are assigning the priority guarantee notes our 'CCC+' issue-level rating with a recovery rating of '4'.
-- We are affirming our 'CCC+' corporate credit rating on ultimate parent company CC Media Holdings and its operating subsidiary, Clear Channel Communications.
-- The negative outlook reflects CC Media's high debt leverage and low interest coverage metrics, which we believe will have to dramatically improve for the company to have flexibility to meet 2016 debt maturities.
Rating Action On Oct. 12, 2012, Standard & Poor's Ratings Services assigned Clear Channel Communications Inc.'s proposed $2 billion priority guarantee notes due 2019 an issue-level rating of 'CCC+' (the same level as the 'CCC+' corporate credit rating on the parent company) and a recovery rating of '4', indicating our expectation for average (30% to 50%) recovery in the event of a payment default.
In addition, we are affirming our 'CCC+' corporate credit rating on both the holding company, CC Media Holdings Inc., and operating subsidiary Clear Channel, which we view on a consolidated basis. The rating outlook is negative.
Standard & Poor's Ratings Services' rating on San Antonio, Texas-based CC Media Holdings Inc. reflects the company's steep debt leverage and significant 2016 debt maturities. The proposed transaction extends about $2 billion of debt from 2014 and 2016 to 2019 and reduces 2016 maturities from $12 billion to a little over $10 billion. However, the interest rate on the new debt is about 5% higher than the existing term loan B debt. As a result, we expect that EBITDA coverage of interest will be very thin at about 1.2x and that discretionary cash flow will be only modestly positive in 2013, hindering the company's ability to repay debt and afford additional refinancing transactions with similar interest rate increases. The transaction increases the company's flexibility to repay 2014 maturities (currently $1.5 billion), which previously could only be repaid on a pro rata basis, and now permits the company to exchange and extend $3 billion of additional loans. We still view a significant increase in the average cost of debt or deterioration in operating performance for either cyclical, structural, or competitive reasons, as major risks as the company proceeds with a strategy to deal with its 2016 maturities.
We view CC Media's financial risk profile as "highly leveraged" (based on our criteria), given its significant refinancing risk, narrow EBITDA coverage of interest expense, and minimal discretionary cash flow compared with its debt burden. CC Media has a "fair" business risk profile, because of its position as the largest global outdoor advertising company and largest U.S. radio station operator.
CC Media is the largest U.S. radio broadcaster, with over 55% of its stations located in the top 100 markets. It has the No. 1 or No. 2 audience position in the top 10 markets, which positions stations for better ad pricing, and its size and scale confer significant cost efficiencies. Ad rates in the radio industry dropped sharply during the 2008-2009 recession, and while CC Media and competitors have experienced some ad rate growth over the past few years, we suspect ad rates remain well below prerecession levels.
CC Media's more stable global outdoor business has good geographic diversity, with a presence in over 40 countries. We see moderate longer-term growth prospects in the outdoor segment, which is under significantly less structural pressure than certain other local media, such as newspapers and directories. The outdoor segment benefits from the increasing deployment of digital billboards and the ongoing slow recovery in ad rates and occupancy. Radio, however, is subject to lower revenue visibility, in our opinion. We believe that radio operators will have to meaningfully enhance their online and mobile efforts to avoid revenue erosion. CC Media's established local and national market reach work to its advantage in this endeavor.
Under our base-case scenario, for the second half of 2012, we expect revenue and EBITDA to grow at low-single-digit and mid-to high-single-digit percentage rates, respectively, because of modest growth in media and entertainment (i.e. radio) and outdoor advertising revenue. We believe international outdoor revenue will continue declining in the second half of this year on macroeconomic weakness, notably in Europe, and unfavorable foreign exchange rate movements. The media and entertainment segment should benefit from political spending and lower music license fees in the second half of 2012. Our outlook could improve or worsen based on the global economy and advertising demand. For 2013, we expect both revenue and EBITDA to grow at a low-single-digit percentage rate, assuming all of the growth will come from the outdoor segment. Expanded digital capacity, largely in the outdoor segment, should contribute to growth, although an increase in inventory could put pressure on advertising rates over the intermediate term. Ongoing secular trends in radio advertising and tough comparisons from the absence of meaningful political advertising in 2013 will lead to flat to slightly lower media and entertainment revenue, in our view. Outdoor revenue should continue growing at a low- to mid-single-digit percentage rate in 2013 because of easier comparisons, expansion in new geographies, and more digital billboards. Longer term, we believe CC Media should be able to achieve revenue growth in line with or slightly above GDP growth in its outdoor segment, which has lower structural pressure.
Second-quarter performance was slightly below expectations because of declines in international outdoor advertising revenue. The media and entertainment and Americas outdoor segments' performance was in line with our expectations. Revenue was flat, with declines in international outdoor advertising revenue offsetting media and entertainment segment revenue growth. EBITDA increased 5% because of lower music license fees at the media and entertainment segment. Media and entertainment revenue was up 3% on increases in local and national ad sales and growth in digital revenues. Outdoor revenue increased 1% in the Americas on growth in digital billboards. International outdoor revenue fell 6% on unfavorable foreign exchange rate changes. The EBITDA margin (treating stock-based compensation as an expense) was essentially unchanged at 29% for the 12 months ended June 30, 2012, compared with 28.8% in the prior-year period. We expect modest margin expansion, led by the international outdoor segment, once foreign exchange and economic headwinds ease, which could take years. Longer term, CC Media could face advertising share and audience losses to digital media, especially in radio, which could put pressure on ad rates and margins.
Based on our operating assumptions, we believe CC Media has more than ample liquidity to meet its roughly $312 million of unsecured pre-LBO notes that mature in 2013 with cash on hand and modest discretionary cash flow. The company can probably meet its 2014 maturities of $1.5 billion through cash on hand in addition to asset-based borrowing, if necessary. The more formidable refinancing risk is in 2016, with $12.1 billion of secured and unsecured debt maturities. The proposed transaction will likely reduce 2016 maturities to a still very high $10.1 billion. As of June 30, 2012, lease-adjusted total debt (capitalizing both operating leases and minimum franchise payments associated with outdoor operations, and including accrued interest, asset retirement obligations, third-party debt, and guaranteed letters of credit) to EBITDA was very steep, at 11.9x, unchanged from one year ago. In the first quarter of 2012, Clear Channel Worldwide Holdings Inc. (subsidiary of Clear Channel Outdoor Holdings Inc.) issued $2.2 billion of senior subordinated notes due 2020, proceeds of which were used to pay a special dividend on a pro rata basis to Clear Channel Outdoor Holdings (CCO) stock holders. Clear Channel Communications Inc. (CCU) (which owns 89% of CCO) used the proceeds to repay its senior secured credit facilities. Pro forma EBITDA (including restructuring costs) coverage of interest was extremely thin, at about 1.1x as of June 30, 2012, while EBITDA coverage of cash interest was only slightly better, at roughly 1.2x, per our estimates. We expect the coverage ratio to decline if CC Media keeps refinancing debt maturities at higher interest rates or even slightly underperforms our base-case expectations, potentially jeopardizing its liquidity.
For the 12 months ended June 30, 2012, CC Media converted a modest 2% of its EBITDA to discretionary cash flow (excluding dividends paid to CCO public shareholders) because of unfavorable working capital dynamics and higher capital spending. We expect the company to continue to generate positive discretionary cash flow of up to $50 million for the full-year 2012, but that discretionary cash flow will be minimal in 2013 because of higher interest expense and capital spending. Both of the forecasts rely on assumptions of steady, albeit slow, economic growth. The company's ability to refinance ongoing debt maturities and maintain positive discretionary cash flow is a key rating factor.
CC Media has "less than adequate" liquidity, based on our criteria. Although we believe it has sufficient sources of liquidity to meet uses over the next 12 to 24 months, and meets the first three quantitative criteria points below, our assessment of liquidity as less than adequate weighs heavily the last two qualitative assumptions:
-- We expect sources of liquidity over the next 12 months to exceed uses by 1.2x or more, but that this ratio could fall well below 1x in the two to three years.
-- Net sources would be positive even with a 15% drop in EBITDA over the next 12 months, but discretionary cash flow would likely turn negative under this scenario and CC Media would begin to consume cash balances.
-- CC Media has sufficient covenant headroom for EBITDA to decline by more than 15% without it breaching coverage tests (36% headroom as of June 30, 2012).
-- Because of CC Media's high debt burden and low conversion of EBITDA to discretionary cash flow, we do not believe it could absorb high-impact, low-probability shocks, even factoring in capital spending cuts.
-- Although we believe 2012 refinancing and amendment efforts demonstrate that CC Media's relationships with certain lenders are improving, we believe there is little assurance regarding CC Media's standing in the credit markets and long-term relationships with its banks.
As of June 30, 2012, CC Media' liquidity sources included consolidated cash balances of $1.3 billion, and availability equal to the lesser of $625 million or the borrowing base under its receivables-based facility. At June 30, 2012, CC Media had no borrowing capacity under its fully drawn revolving credit facility due 2014. In the first quarter of 2012, revolver borrowing capacity was reduced to $10 million following the permanent repayment of $1.9 billion using the proceeds distributed to CC Media from the Clear Channel Worldwide note offering. Roughly $491.3 million of cash is at CCO, of which we have assumed CCU can obtain roughly $300 million through dividends from CCO (based on 89% ownership and minimum cash requirements of $150 million at CCO). We expect the company to generate about $375 million to $425 million of funds from operations in 2012, increasing to $400 million to $450 million in 2013. Liquidity uses include unsecured debt maturities of roughly $312 million in 2013, which we expect the company will meet primarily with cash. We estimate annual capital spending needs of around $400 million in 2012 and $450 million in 2013, leaving discretionary cash flow of up to $50 million in 2012. We expect discretionary cash flow will be minimal in 2013 as a result of higher capital spending and the absence of political revenue.
CC Media's credit facility contains a 9.5x senior secured net leverage covenant, which steps down to 9.25x in the second quarter of 2013, and gradually to 8.75x in 2014. As of June 30, 2012, leverage (calculated per the covenant's definition) was 6.1x, providing headroom of roughly 36% against EBITDA declines. Because covenants are computed on a net debt basis (subtracting available cash from secured debt), any dissipation of cash balances through negative discretionary cash flow or repayment of unsecured debt maturities will hurt covenant compliance. Given our base-case assumptions, we expect covenant EBITDA headroom will remain at or above 30% in 2013, despite the leverage covenant tightening by a half turn.
Recovery analysis (For the complete recovery analysis, see our recovery report on Clear Channel Communications, to be published following this report on RatingsDirect.)
Our negative rating outlook reflects CC Media's high debt leverage and low interest coverage metrics, which we believe will have to dramatically improve for the company to have flexibility to meet 2016 debt maturities. We could lower our rating if we become convinced that CC Media cannot address 2016 maturities without resorting to subpar debt exchanges. A deterioration of operating performance that suggests increasingly adverse structural trends could be a major factor supporting such a conclusion. Further erosion of the already-subpar trading levels of CCU debt maturities in 2016 and beyond might suggest that a subpar exchange offer would be among alternatives it considers. We would most likely view such a transaction as a selective default under our criteria.
We could revise our outlook to developing over the intermediate term if CC Media takes additional significant steps to address its debt burden without raising interest expense, and if operating performance trends higher. More specifically, if operating performance improves so that cash interest coverage and fully consolidated leverage approach the high-1x area and the 8x area, respectively, CC Media could gain flexibility to refinance 2016 debt maturities, depending on the state of the credit markets. This would require EBITDA to consistently grow at a high-single-digit to low-double-digit rate over the next four years, which we currently regard as unlikely.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Ratings List Ratings Affirmed CC Media Holdings Inc. Clear Channel Communications Inc. Corporate Credit Rating CCC+/Negative/-- New Rating Clear Channel Communications Inc.
$2 bil 9.00% sr secd nts due 2019 CCC+
Recovery Rating 4 Ratings Affirmed Clear Channel Communications Inc. Senior Secured Debt CCC+ Recovery Rating 4 Senior Unsecured Debt CCC- Recovery Rating 6
Clear Channel Worldwide Holdings Inc.
Senior Unsecured Debt B Recovery Rating 1 Subordinated Debt B Recovery Rating 1
(Caryn Trokie, New York Ratings Unit)