S&P Lowers Outlook on Cumulus Media (CMLS) to Stable; Leverage Expected to Remain Elevated

Standard & Poor's Ratings Services revised its rating outlook on Atlanta, Ga.-based Cumulus Media (Nasdaq: CMLS) to stable from positive. We also affirmed our 'B' corporate credit and existing debt ratings on the company.

The outlook revision reflects our expectation that leverage will remain elevated, above 6x, over the next 12 to 18 months. We now expect that leverage will be roughly 6.5x at the end of the year as a result of modest core revenue declines and continued spending on investment initiatives.

The ratings on Cumulus incorporate Standard & Poor's assessment that the radio broadcaster has a "fair" business risk profile, given its healthy EBITDA margin despite secular pressure on radio advertising revenue. We view Cumulus' financial risk profile as "highly leveraged," reflecting its mid-6x debt-to-EBITDA ratio, which is consistent with the 5x–or-higher range that we associate with a highly leveraged financial profile.

We see the potential for weak industry fundamentals to result in revenue erosion over the intermediate-to-long term. Cumulus owns and operates approximately 460 stations in 95 markets, making it the second-largest diversified radio broadcaster, based on the number of stations. We consider the company's business risk profile "fair" because of its healthy EBITDA margin and discretionary cash flow generation. The company is exposed to competition from alternative media, risks to ad rate integrity, and obstacles to significant growth in digital revenue contribution. Digital revenue currently only accounts for about 5% of total industry revenue and only about 4% for Cumulus. We expect Cumulus' partnership with Pulser Media, the parent company of Internet radio broadcaster Rdio, will lead to healthy growth in digital revenue, but that digital will remain a small portion of total revenue. The consolidated company's good geographic diversity and competitive position in midsize and large markets do not offset these risks.

Despite the company repaying more than $210 million of debt and preferred stock since the end of 2012, leverage remains high, in the mid-6x area. Adjusted leverage is in line with the debt-to-EBITDA ratio of greater than 5x that would indicate a "highly leveraged" financial risk profile. We expect leverage will moderate slightly to the mid-6x area by the end of 2014 as a result of debt repayment and higher political advertising. We expect EBITDA coverage of interest will also improve to the mid-2x area by the end of 2014 as a result of lower debt balances and lower interest rates on the company's debt.

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