The leverage is still very high at radio giant Clear Channel, but a new note proposal which would come due in 2021 will allow it to clear out a 2014 maturity and allow the company to focus on two others maturing in 2016.
The company is proposing $500 million Priority Guarantee Notes. That would lead to a pay down of $847M of a facility maturing in July 2014, and permitting the company to shift its focus on $8.2B due January 2016 and another $1.9B due later that year in August.
The initiative is expected to increase interest expense by an estimated $30M, though Moody’s said a final price tag on that front was pending.
The analysts at Moody’s noted that Clear Channel’s Caa2 Corporate Family Rating is based on very high 11.5x leverage, along with weak cash flow and added interest burdens.
Addressing the company’s vulnerabilities, Moody’s added, “Even if Clear Channel is able to refinance its 2016 maturities, the company will remain vulnerable to a slowdown in the economy given the heightened sensitivity that its radio and outdoor businesses have to economic conditions. The combination of higher interest rates from a refinancing and lower EBITDA in the event of a future economic downturn could materially impair its interest coverage and liquidity position. In addition, there are secular pressures on its terrestrial radio business that could weigh on results as competition for advertising dollars and listeners are expected to increase going forward. Also incorporated in the rating, is the expectation that leverage levels will remain high over the rating horizon compared to the underlying asset value of the firm.”
On the plus side is its large share of the radio revenue pool and its geographic diversity, plus beneficial majority ownership of Clear Channel Outdoor.
It can maintain its stable rating by pulling flat to low-single-digit revenues, and will benefit from having no major maturities to deal with through 2015. If it can translate business success to getting its leverage less that 10x, Moody’s would likely award it with an upgrade. And it must hope to avoid secular weakness in the radio business or economic weakness overall.
RBR-TVBR observation: Bain and Thomas Lee Partners did not exactly pick the best time in world history to jump into the radio business. In fact, we remember when some skeptics were sure the company would implode, due to the ill-timed acquisition that featured a high price tag right ahead of a downturn in revenues.
However, the company has proven to be very resourceful at managing its debt load and operating and developing its assets, including potentially industry-changing initiatives such as iHeart and its pioneering content deals with various record labels.
As Moody’s notes, an improvement in the company’s fortunes could go a long way toward reducing leverage and improving its overall financial health.
However, if another economic rough patch hits, things could get ugly. Stay tuned.