Cumulus Media (CMLS) CFR Downgraded to 'B3' by Moody's; Sees Debt-to-EBITDA at Continually High Levels
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Moody's Investors Service ("Moody's") downgraded Cumulus Media's (Nasdaq: CMLS) Corporate Family Rating to B3 from B2, Probability of Default Rating to B3-PD from B2-PD, and Speculative Grade Liquidity Rating to SGL-3 from SGL-2. Moody's also downgraded the company's secured credit facilities to B2 from B1 and senior unsecured 7.75% notes to Caa2 from Caa1. The downgrades reflect Moody's view that the pace of debt repayment and delevering will be slower than expected. Although $200 million of pending asset sales are to be completed within the next 18 months, we now believe revenue and EBITDA growth will remain below our prior expectations reflecting underperformance in key markets and with the company's radio networks. The outlook is stable.
..Issuer: Cumulus Media Inc.
.Corporate Family Rating: Downgraded to B3 from B2
.Probability of Default Rating: Downgraded to B3-PD from B2-PD
.Speculative Grade Liquidity (SGL) Rating: Lowered to SGL-3 from SGL-2
.Outlook is Stable
..Issuer: Cumulus Media Holdings Inc.
....$200 million 1st Lien Senior Secured Revolver due 2018 (undrawn): Downgraded to B2, LGD3 from B1, LGD3
.1st Lien Senior Secured Term Loan due 2020 ($1.9 billion outstanding): Downgraded to B2, LGD3 from B1, LGD3
.$610 million of 7.75% senior notes due 2019: Downgraded to Caa2, LGD5 from Caa1, LGD6
Cumulus' B3 Corporate Family Rating reflects Moody's expectation that debt-to-EBITDA will remain elevated and in the mid to high 8x through FYE2015 (including Moody's standard adjustments) due to continued revenue declines in core ad sales and network revenue as well as the absence of political ad spending in 2015, an odd numbered year. We expect leverage to improve in 2016 through a combination of EBITDA growth and debt repayment with free cash flow plus proceeds from planned asset sales ($125 million in 1Q2016 plus another $75 million within 12 months). Despite the decline in EBITDA margins to roughly 25% for 2015 compared to 33% in 2013, we expect the company to generate low single digit percentage free cash flow-to debt in 2015 improving to the mid single digit percentage range in 2016. Management is intent on turning around performance and has hired numerous executives with experience in businesses Cumulus has targeted for growth. Ratings are supported by Cumulus' national scale and our expectation that revenue will stabilize in 2016 as increased demand for political advertising in the second half of 2016, an election year, and incremental sales from newer revenue streams (sports businesses including the NFL and NASH country music initiatives) offset flat to low single digit percentage declines in core time sales. Management is committed to debt repayment and has repaid more than $500 million of debt and preferred stock since the Citadel acquisition at the end of 2011. Lower leverage will provide some financial flexibility and partially offset risks related to the maturing demand for radio advertising, media fragmentation and potential for increased competition within its markets. Management stated its target reported gross debt-to-EBITDA leverage is 4.0x or better and we expect the company will apply most of its free cash flow to repay debt until leverage comes closer to this target. After which, Cumulus may look to fund dividends from a portion of free cash flow, step up investments in organic growth, or fund tuck-in acquisitions.
The stable outlook reflects Moody's expectations for Cumulus to achieve generally flat revenue growth over the next 18 months as political ad demand in 2016 and improved network results add to flat to low single digit percentage declines in core time sales. The outlook incorporates an improvement in leverage and coverage ratios as free cash flow and asset sale proceeds (roughly $200 million) are applied to reduce debt balances. The outlook does not include debt financed acquisitions or distributions. Ratings could be downgraded if we expect debt-to-EBITDA will be sustained above 8.0x (including Moody's standard adjustments) after the sale of real estate in LA (expected 1Q2016) due to deterioration in performance as a result of increased competition or weak ad demand in key markets, or audience and advertising revenue migration to competing media platforms. Deterioration in liquidity could also result in a downgrade. We could consider an upgrade of ratings if the company sustains leverage under 6.5x (including Moody's standard adjustments) with expectations for stable operating performance. Liquidity would also need to be good with improved availability under the company's committed revolver facilities and free cash flow-to-debt in the high single digit percentage range. The company is not able to draw under the revolver as reported 1st lien net leverage of 6.3x as of June 30, 2015 exceeds the 5.5x test.
The principal methodology used in these ratings was Global Broadcast and Advertising Related Industries published in May 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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