How Moody’s Downgrades Cumulus
Moody’s Investors Service downgraded Cumulus Media Inc.’s Corporate Family Rating to Caa1 from B3 and Probability of Default Rating to Caa1-PD from B3-PD.
Moody’s also downgraded the company’s secured credit facilities to B3 from B2 and senior unsecured 7.75% notes to Caa3 from Caa2. The downgrades reflect Moody’s revised forecast indicating a decline in EBITDA over the next 12 months resulting in elevated leverage and reduced free cash flow. The outlook is stable.
The investor’s service points to Cumulus Media’s “excessive leverage with debt-to-EBITDA exceeding 9.5x and Moody’s revised expectation that that debt-to-EBITDA will remain elevated over the next 12 months” because of continued declines in network revenue and increased operating expenses “more than offsetting” the benefits from an expected increase in station group revenue and political ad sales in 2016.
Despite debt repayment from the sale of $200 million of non-core real estate holdings to close in 2017, leverage will remain above Moody’s prior expectations due to deterioration in consolidated EBITDA extending into 2016. Liquidity is adequate over the next 12 months with an undrawn $50 million revolving securitized facility and low single digit percentage free cash flow-to debt despite the decline in EBITDA margins to less than 23% of revenue compared to 33% in 2013 (including Moody’s standard adjustments).
Moody’s believes the risk of a restructuring, including a distressed exchange, is high given the need to meaningfully reduce leverage in advance of the May 2019 maturity of the notes and potential acceleration of the term loan maturity.
Separately, Cumulus Media recently disclosed its proposal to exchange the 7.75% unsecured notes for secured commitments under the $200 million revolver plus equity. It is uncertain that the transaction will be completed; however, as proposed, the exchange of all $610 million of notes would come with a significant discount to face value. Moody’s says it would consider a transaction of this size and discount as a distressed exchange and consider that a limited default.
The stable outlook reflects Moody’s expectation for Cumulus to achieve generally flat revenue growth over the next 12 months supported by political ad sales in 2016 and sustained demand in core time sales.