(The following statement was released by the rating agency)
-- U.S. TV broadcaster LIN TV is acquiring New Vision Television.
-- The company plans to issue $290 million of senior unsecured notes to partially finance this acquisition.
-- We are assigning the proposed notes our 'B-' issue level rating and raising our ratings on the company's 8.375% senior notes to 'B-' as well.
-- The stable rating outlook reflects our expectation that LIN's operating performance will improve in 2012, enabling it to further reduce its leverage so that fully adjusted debt (including leases, pensions, and off-balance sheet-obligations) to trailing-four-quarter EBITDA could improve to below the mid-6x level by the end of the year.
Rating Action On Oct. 4, 2012, Standard & Poor's Ratings Services assigned Providence, R.I.-based LIN Television Corp.'s proposed $290 million of senior unsecured notes due 2021 its 'B-' issue-level rating and '5' recovery rating, indicating our expectation for modest (10% to 30%) recovery in the event of a payment default. LIN Television Corp. is a wholly owned subsidiary of parent LIN TV Corp. (LIN), a U.S. TV broadcaster. LIN plans to use the net proceeds to partly finance its acquisition of New Vision Television. Pro forma for the transaction, we expect LIN's debt to last-12-month EBITDA (adjusted for leases, pension, and contingent obligations) to rise to about 8.7x from 6.9x as of June 30, 2012. However, with the influx of political advertising revenues and retransmission fees in 2012, we expect adjusted debt to last-12-month EBITDA to decline to below the mid-6x level by year-end. We expect the acquisition to close in 2012.
At the same time, we raised the issue-level rating on LIN Television Corp.'s 8.375% senior notes due 2018 to 'B-' from 'CCC+' and revised the recovery rating to '5' from '6'. The upgrade reflects the higher default-scenario valuation of the company resulting from the acquisition.
Finally, we affirmed the 'B' corporate credit rating on LIN. The outlook remains stable.
Our rating on LIN also reflects our assessment of the company's business risk profile as "fair" and its financial risk profile as "highly leveraged," based on our criteria. We view LIN's business risk profile as fair based on its portfolio of TV stations in midsize markets, strong position in local news, and an EBITDA margin comparable to its peers. Factors in our assessment of LIN's financial risk profile as highly leveraged include its high debt leverage and large contingent liability stemming from its guarantee of $815 million joint-venture debt. LIN's fully adjusted leverage of 7x, as of June 30, 2012, is in line with our financial risk indicative ratios of debt to EBITDA of greater than 5x, for a highly leveraged financial risk profile.
LIN is a midsize TV broadcaster. Pro forma for the New Vision Television transaction, LIN will operate or service 50 network affiliates in 23 markets, reaching 10.6% of U.S.TV households. The 18 New Vision TV stations confer greater geographic diversity, particularly in the Western U.S. markets. LIN's station affiliations are diversified across the four major U.S broadcast networks, shielding it from the risk of individual network underperformance. Most of the company's stations are ranked first or second in local news--an important competitive edge for building loyal local viewing and attractive political advertising. Additionally, its duopoly positions in a number of its markets provide cost savings, enhancing cash flow. LIN's EBITDA margin of about 30% is only average among its broadcasting peers and significantly lags its more efficient competitors, whose EBITDA margins are in the high-30% area.
Under our base-case scenario for 2012 (which includes the New Vision TV stations for about three months), we expect LIN's revenue to grow at over a 30% percentage rate and EBITDA to rise by over 60%, reflecting sharp increases in political ad revenue and retransmission fees from recently renewed carriage contracts, despite only low-single-digit percent growth in core ad revenue. We also expect moderate EBITDA margin expansion, which is likely to be more evident in election years, as the proportion of political advertising in the revenue mix is relatively high for LIN compared to its peers, leading to moderate revenue and EBITDA variability between election and nonelection years.
In the quarter ended June 30, 2012, revenue and EBITDA grew 20% and 41%, respectively, largely reflecting strong growth in political ad revenues and retransmission consent fees. Core ad revenue grew 6%, as the largest category--auto advertising--was up 25%. For the 12 months ended June 30, 2012, the EBITDA margin was 31%, down from 35% for the same period in 2011, as the full benefit of high-margin presidential and local political ad revenue will be concentrated in the second half of this year.
In 2011, LIN and NBC Universal (NBCU) extended $12.2 million of shortfall loans to their joint venture, Station Venture Holdings LLC, so the venture could fund its interest payments. LIN contributed $2.5 million, its 20% share of debt service shortfalls. The joint-venture shortfall agreement between LIN and NBC Universal's 49% owner, General Electric Co., has been extended to April 1, 2013, because the joint venture is unlikely to cover its 2012 interest expense on its own. We view GE as having some incentive to continue its support because GE Capital Corp. is the sole lender in the venture's $815.5 million debt maturing 2023. Although Comcast Corp., NBCU's 51% owner, does not support the venture, the venture's two stations in Dallas and San Diego are important NBC affiliates. LIN estimates its share of shortfalls loans will be about $4 million during 2012 and into 2013. We believe LIN's $815.5 million guarantee of the debt of its joint venture with NBC Universal is a significant financial risk for the company; we therefore consolidate a portion of the joint-venture debt in determining LIN's credit measures. We add $296 million in incremental debt, which is the present value of the guaranteed debt ($815.5 million), less an assumption of joint-venture station proceeds based on a conservative 6.5x multiple (relating to a hypothetical joint-venture distressed scenario) of trailing eight-quarters' joint-venture EBITDA.
As of June 30, 2012, LIN's debt (adjusted for leases, pensions, and contingent joint-venture obligations) to trailing-four-quarter EBITDA ratio was high, at 6.9x (essentially unchanged from 6.8x one year ago). Pro forma for the New Vision TV stations acquisition, we expect this metric to be essentially unchanged at 7x. Using average trailing-eight-quarter average EBITDA to smooth the differences between election and nonelection years, LIN's lease-adjusted debt to EBITDA was still highly leveraged, at 7x, but down from 7.7x a year ago and will be essentially unchanged pro forma for the acquisition. EBITDA coverage of interest was improved, at 3.2x, versus 2.8x a year ago. By the end of 2012, Pro forma for the New Vision TV transaction, fully adjusted leverage, on a trailing-four-quarter EBITDA basis, could improve to about below 6x level (below 7x on a trailing-eight-quarter EBITDA basis). We expect interest coverage to fluctuate between 2.5x and 3.5x, as EBITDA varies during the election cycle.
For the 12 months ended June 30, 2012, LIN TV's discretionary cash flow declined to $52 million, compared with $65 million one year ago. Conversion of EBITDA into discretionary cash flow also fell to 37%, from 46% one year ago, caused by higher negative working capital and capital expenditures. Despite higher capital spending forecasted for 2012, we expect discretionary cash flow to more than double in 2012 (to $90 million-$100 million) from 2011 levels with the addition of the New Vision stations and the return of political ad revenue.
Based on our criteria, LIN's sources of liquidity are "adequate" to cover uses over the next 12 to 18 months. Our assessment of its liquidity profile incorporates the following factors, expectations, and assumptions:
-- We expect sources of liquidity over the next 12 to 18 months to exceed uses by at least 1.2x.
-- We expect net sources to be positive, even if EBITDA drops 25%, which is normal for a local TV broadcaster in an odd-numbered nonelection year.
-- Compliance with financial covenants could survive a 20% drop in EBITDA, in our view.
-- We believe LIN has a somewhat diminished ability to absorb, with limited need for refinancing, low-probability, high-impact events over the next 12 months. Our view is based on LIN's guarantee of $815.5 million joint-venture debt and the venture's dependence on its two key investors for liquidity support.
-- LIN has good relationships with its banks, in our assessment, and a good standing in the capital markets.
Liquidity sources as of June 30, 2012, included cash balances of $9 million, availability of $65 million under its revolving credit facility (which matures in October 2016), and our expectation of more than $120 million of funds from operations in 2012. These liquidity sources will be more than sufficient to fund working capital needs, annual capital expenditures of between $20 million and $25 million (per our assumptions), and debt maturities of about $12 million over the next two years, consisting mainly of scheduled term loan amortizations. We expect LIN to generate $90 million to $100 million of discretionary cash flow in 2012, mainly when political ad revenue peaks in the second half of the year, and remaining at the same level in 2013, when a full year of New Vision cash flow compensates for the absence of political advertising in 2013.
LIN TV's credit facilities contain total leverage and senior leverage covenants and also an interest coverage covenant. It had a 32% EBITDA cushion against its 6.0x consolidated leverage covenant, a 28% EBITDA cushion against its 3.75x senior leverage covenant, and a 34% EBITDA cushion against its 2.25x interest coverage covenant as of June 30, 2012. The senior leverage covenant tightens more sharply than the other two tests, from 3.75x to 3.0x by the end of 2012 and we expect LIN to face modest covenant compliance pressures, particularly in nonelection years. However, it should still be able to maintain adequate covenant headroom through the election cycle.
Recovery analysis For the complete recovery analysis, please see Standard & Poor's recovery report on LIN TV, to be published following this report on RatingsDirect.
The stable rating outlook reflects our expectation that LIN's operating performance will improve in 2012, enabling it to further reduce its leverage so that fully adjusted debt (including leases, pensions, and off-balance-sheet obligations) to trailing-four-quarter EBITDA could improve to below the mid 6x level by the end of the year. We could raise the rating if we believe LIN can maintain this leverage metric below 6x (and its lease-adjusted debt to average trailing-eight-quarter EBITDA also below 6x) throughout the election cycle and if the joint venture can improve its operating performance to the extent that it no longer requires shortfall loans.
Conversely, we could lower our rating if revenue and EBITDA falter because a derailing of the economic recovery reverses core ad revenue growth, resulting in strained liquidity and narrowing senior leverage covenant headroom; or if the operating performance of its joint venture with NBCU continues to deteriorate, thereby requiring LIN to substantially increase its support through shortfall loans and funding; or if GE decides to no longer provide financial support to the joint venture.
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 LIN TV Corp. Corporate Credit Rating B/Stable/-- LIN Television Corp. Senior Secured BB- Recovery Rating 1 New Rating LIN Television Corp.
$290M sr unsecd notes due 2021 B-
Recovery Rating 5 Upgraded To From LIN Television Corp. Senior Unsecured B- CCC+ Recovery Rating 5 6
(Caryn Trokie, New York Ratings Unit)