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. 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 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.
Pro forma for the drawdown of its $2 billion revolving credit facility, Clear Channel derives its liquidity from cash balances and modest discretionary cash flow, which we believe could turn negative in 2009 under continued EBITDA declines. As of Sept. 30, 2008, the company reported $244 million of cash on hand, which doesn't include the $1.6 billion drawn from the revolver on Feb. 6, 2009. Borrowing capacity of $250 million on the company's receivables-based credit facility also provides liquidity.
Financial covenants in the senior secured bank facility include an initial maximum leverage ratio of secured net debt to adjusted EBITDA of 9.5x, beginning in the first quarter of 2009. The covenant will remain at 9.5x through the first quarter of 2013. As of Sept. 30, 2008, we estimate secured net leverage at roughly 6.0x, but are concerned the company could violate covenants in the second half of 2009. Near-term maturities include $500 million of 4.25% notes due in May 2009, and the remaining balance of the 7.65% notes due in 2010--both of which we would expect the company to meet with its committed delayed-draw term loan (DDTL). The company has the capacity under the DDTL to redeem these maturities at par. We expect the company to use cash to pay at maturity the $250 million of 4.5% notes due in 2010. The next sizable maturities are in 2011, at roughly $946 million, which we believe could prove challenging depending on the state of the credit markets and economy.
Friday, February 20, 2009
Posted by Tyler Durden at 4:37 PM
S&P, which has recently improved from lagging by 3 years to being behind by only a month or so (amazing considering Moody's believes it is still in the 19th century), downgraded Clear Channel From B to B-, and kept it on CreditWatch Negative, expecting further downgrades. As we wrote on February 10, the surprising draw down of CCU's credit facility should have raised numerous eyebrows. In a uncharacteristically harshly worded statement, S&P goes to town on demolishing any non bankruptcy credibility Clear Channel thinks it may have.
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