Changing the shade of Gray


Gray TelevisionOne of the major debt ratings agencies has been taking a look at Gray Television’s financials. The result is a change in the ratings outlook for the 36-station group.

Moody’s Investors Service changed Gray Television’s rating outlook to positive from stable and affirmed the company’s existing ratings, including its Caa1 Corporate Family Rating (CFR), Caa1 Probability-of-Default Rating (PDR), debt instrument ratings, and SGL-2 Speculative Grade Liquidity (SGL) rating.

“The outlook change reflects improved operating performance and credit metrics as well as expectations for the company to grow revenue and EBITDA meaningfully during the current election and Summer Olympics year resulting in further improvement of two-year average credit metrics. Loss given default point estimates were updated to reflect the current debt mix,” said Moody’s.

Gray has approximately $877 million of debt rated by Moody’s.

Here is some of the analysis from the ratings agency:

“Gray’s Caa1 corporate family rating reflects very high leverage with a 2-year average debt-to-EBITDA ratio of 7.6x as of December 31, 2011 (including Moody’s standard adjustments) and modest free cash flow-to-debt ratios of less than 1% as a result of consistent preferred share repurchases. Debt balances increased $18 million in 2011 (including Moody’s standard adjustments) reflecting a $15 million increase in unfunded pension obligations plus revolver advances to partially fund preferred share repurchases. Looking forward, we expect Gray will continue to benefit from strong demand for political advertising during election years resulting in markedly higher EBITDA growth in 2012 and resulting in 2-year average debt-to-EBITDA ratios estimated at 6.8x — 7.0x by the end of 2012. Ratings are supported by Gray’s consistent track record for #1 and #2 ranked positions in 29 of 30 markets and good EBITDA margins (including Moody’s standard adjustments) reflecting its top ranked local news programming that captures a significant share of in-market revenue, its relatively low syndicated program costs, and expected cash flow benefits from growing retransmission revenues (net of reverse compensation). Gray’s television stations and associated digital properties also benefit from its strategy of operating stations in university markets (17 collegiate markets) and/or state capitals (8 state capitals) which generally have more stable economies; however, we believe the volatile nature of the company’s earnings due to its relatively high level of political revenues increases risks related to unexpected changes in regulations governing political campaign spending. The positive outlook reflects our expectation that the company will generate more than a 40% increase in EBITDA in 2012 given expected demand for political advertising and the Summer Olympics and that core revenues will continue to grow in the low single digits beyond 2012 allowing Gray to continue to improve its 2-year average debt-to-EBITDA ratios. Assuming free cash flow is applied to reduce debt balances, there would be upward pressure on debt ratings.

We believe it is critical that Gray continue to focus on reducing debt balances and improving liquidity, especially during even numbered years, to achieve operating and financial flexibility as well as to absorb risks related to media fragmentation, reliance on political advertising, and eventual need to refinance 2014-2015 maturities. Ratings incorporate our expectations for good liquidity, notwithstanding our expectations that Gray will continue to repurchase up to $20 million of preferred shares (17% accruing dividend) in 2012 and again 2013.

The positive outlook incorporates our expectation that Gray will generate strong political revenue, especially in the second half of 2012, and that EBITDA for 2012 will increase at least 40% above 2011 levels resulting in meaningfully reduced debt-to-EBITDA leverage and more than

$40 million of excess cash flow after $20 million of preferred share redemptions. The outlook also incorporates our view that the company will maintain good liquidity and that demand for core, non-political advertising will continue to improve. Notwithstanding management’s plan to fund $20 million of preferred share repurchases for each of the next two years, the outlook also incorporates our expectation that free cash flow will continue to be applied to reduce debt balances resulting in lower debt-to-EBITDA ratios.”

Moody’s noted that Gray owns 36 primary television stations serving 30 mid-sized markets plus 40 digital second channels. Network affiliations for primary stations include 17 CBS, 10 NBC, 8 ABC and 1 Fox station. The company operates stations ranked #1 or #2 in 29 of 30 markets. Gray is publicly traded and the shares are widely held with J. Mack Robinson or affiliates owning approximately 3.1% of common shares. The dual class equity structure provides J. Mack Robinson or affiliates with 39.4% of voting control.

Here are the Moody’s updates:

.. Issuer: Gray Television, Inc.

…. $40 Million 1st Lien Sr Sec Revolver due December 2014: Affirmed B2, (point estimates updated to LGD2 — 26% from LGD2 — 28%)

…. $925 Million 1st Lien Sr Sec Revolver due December 2014 ($472 million outstanding): Affirmed B2, (point estimates updated to LGD2 — 26% from LGD2 — 28%)

…. $365 Million 10.5% 2nd Lien Sr Sec Notes due June 2015 ($365 million

outstanding): Affirmed Caa2, (point estimates updated to LGD5 — 80% from LGD5 — 82%)

Outlook Actions:

.. Issuer: Gray Television, Inc.

…. Outlook, Changed to Positive from Stable