Standard & Poor’s has cut the corporate credit rating of Clear Channel Communications from B to B-, and also cut its issue-level ratings. Both ratings remain on S&P CreditWatch. Clear Channel was acquired last year by Bain Capital and THL Partners.
Standard & Poor’s Ratings Services to-day lowered its corporate credit and issue-level ratings on San Antonio, Texas-based CC Media Holdings Inc. and its operating subsidiary, Clear Channel Communications Inc. (we rate both entities on a consolidated basis), by one notch. The corporate credit rating was lowered to ‘B-‘ from ‘B’. These ratings remain on CreditWatch with negative implications, where they were placed Feb. 13, 2009, reflecting our concerns over financial covenant compliance.
“The ratings downgrade and continued CreditWatch listing reflects our deepening concerns about the company’s ability to maintain compliance with financial covenants amid the worsening recession, especially in light of extremely weak recent results reported by peer radio and outdoor companies,” explained Standard & Poor’s credit analyst Michael Altberg.
Under our baseline scenario, including our assumptions regarding possible covenant add-backs under Clear Channel’s credit agreement, we estimate that the company could violate covenants in the second half of 2009, or sooner if EBITDA declines are greater than our expectations. This scenario contemplates EBITDA declines in the 40% area over the next several quarters, with declines moderating toward the second half of the year. Our downside scenario contemplates EBITDA declines in the 40% to 50% range over the near term. Under our baseline scenario, EBITDA coverage of net interest could decline to less than 1x. For this reason, if the company were able to obtain an amendment from bank lenders, we believe it would need to use cash balances to meet any potential upfront fees and increases in interest rate spreads.
For the third quarter of 2008, revenue and EBITDA (excluding noncash stock compensation) dropped 4% and 16%, respectively. Declines in the outdoor segment were primarily led by decreases in higher-margin U.S. billboard revenue. We expect fourth-quarter results to be materially worse than the third quarter, due to continued softening at the outdoor segment and further pressure on key advertising categories such as automotive, retail, and financial services, as well as unfavorable foreign currency trends at its European outdoor business. For the first half of 2009, the company faces more difficult year-over-year comparisons at its outdoor business, as this segment didn’t show the same level of comparable weakness in local advertising as other media until the third quarter of 2008. Due to the longer-term nature of contracts, we believe the outdoor business could show a slight lag in recovery as well, even after economic conditions improve. In addition, we are concerned that negative secular trends facing the radio industry could limit a rebound in 2010.
Pro forma for the company’s subpar tender offer completed on Dec. 23, 2008, balance sheet debt to EBITDA was very high, in our view, at about 9.6x as of Sept. 30, 2008, up from 9.4x at June 30, 2008. Our calculation of lease-adjusted total debt (capitalizing both operating leases and minimum franchise payments associated with outdoor, and including third-party debt, guaranteed letters of credit, and acquisition-related earn-out payments) to EBITDA was still higher, at 10.6x. Pro forma for the company’s full drawdown of its $2 billion revolving credit facility, fully adjusted leverage climbs to a steep 11.4x. For the 12 months ended Sept. 30, 2008, the conversion of EBITDA to discretionary cash flow was still good, in our view, at 48%. For 2009, we believe that discretionary cash flow could turn modestly negative, eating into cash balances.
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