S&P Downgrades Salem Media Group (SALM) to 'B-'; Debt-Financed Acquisitions Have Increased Leverage

Standard & Poor's Ratings Services said that it lowered its corporate credit rating on Salem Media Group Inc. (Nasdaq: SALM) to 'B-' from 'B'. The rating outlook is negative.

At the same time, we lowered our issue-level rating on the company's senior secured term loan to 'B-' from 'B', based on our notching criteria. The '3' recovery rating is unchanged, indicating our expectation for meaningful recovery (50%-70%; upper half of the range) of principal in the event of a payment default.

"The downgrade reflects Salem Media's narrowing margin of compliance with its covenants, largely due to debt-financed acquisitions and related expenses," said Standard & Poor's credit analyst Heidi Zhang. Salem has reformatted the acquired stations, and we do not expect meaningful EBITDA contributions from these stations until 2017. The company had a 10% EBITDA margin of compliance on its total net leverage covenant as of Sept. 30, 2015. Due to the scheduled covenant step-down in the first quarter of 2016 and the programming expenses related to the acquired stations, we believe that the margin of covenant compliance will fall below 10% in the first half of 2016, despite the political revenue uplift. The company final leverage covenant step down will occur in March 2017. We believe the EBITDA margin of compliance will remain thin in 2017 if the company does not direct most of its discretionary cash flow to debt repayment, undertakes additional debt financed acquisitions, or experiences material business weakness.

"The negative rating outlook reflects our view that Salem Media's margin of compliance with covenants will remain thin over the next year, given the tight covenant cushion and upcoming covenant step-downs," said Ms. Zhang.

We could consider lowering our corporate credit rating on Salem Media if the company underperforms our base-case expectations, causing the margin of covenant compliance to fall below 5% and increasing the risk of covenant violation. Factors that could contribute to this scenario include material business weakness, or any debt-financed acquisitions that cause leverage to increase.

We could revise the outlook to stable if we believe the company will sustain a covenant cushion of at least 10% over the next 12-24 months.

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