TEXT-S&P revises Media General recovery rating
Overview -- Diversified media company Media General recently completed a very short-term amendment to its credit facility and plans to explore the potential sale of its newspapers. -- Weaker-than-expected digital and print revenue caused the company's cushion of compliance with covenants to narrow to very thin levels at the end of 2011. -- We are revising our recovery rating on the company's senior secured notes to '3' from '4'. The 'CCC+' issue rating on this debt remains unchanged. We are also affirming our 'CCC+' rating on the company. -- The negative rating outlook reflects the possibility that the company could violate covenants at the end of March if it is unable to amend covenants. Rating Action On Feb. 29, 2012, Standard & Poor's Ratings Services revised its recovery rating on Richmond, Va.-headquartered Media General Inc.'s senior secured notes to '3', indicating our expectation of meaningful (50% to 70%) recovery for lenders in the event of a payment default, from '4' (30% to 50% recovery expectation). The issue-level rating on the senior secured notes remains unchanged at 'CCC+', at the same level as the 'CCC+' corporate credit rating on the company, in accordance with our notching criteria for a '3' recovery rating. The revision of the recovery rating reflects an improvement in our estimate of market liquidity and the resulting distressed asset valuation for Media General's broadcasting assets under our 2012 simulated default scenario. At the same time, we affirmed our 'CCC+' corporate credit rating on Media General. The rating outlook is negative. Rationale The 'CCC+' rating on Media General reflects our expectation that the company will likely violate covenants at the end of March if it is unable to amend its bank loan covenants. Media General's business risk profile is "vulnerable" (as per our criteria), based on structural pressure on the U.S. newspaper industry, TV broadcasting's mature long-term growth prospects, and increased competition for audience and advertisers from traditional and nontraditional media. Very high lease- and pension-adjusted debt to EBITDA, of 8.6x as of Dec. 25, 2011, underpins our view of Media General's financial profile as "highly leveraged." We could lower the rating if the company doesn't make meaningful progress in addressing covenant risks over the coming month and we become convinced that a violation is imminent. Media General's businesses include newspaper publishing, TV broadcasting, and digital media, located mainly in the Southeastern U.S. Its revenue concentration is in newspaper publishing, which is facing negative structural trends from readership and advertising moving away from print to online sources. This segment has reported five years of revenue declines, and we believe that ongoing cost reductions will be required in order to maintain the viability of the company's print publications. Media General's three largest newspapers together constitute about 60% of the company's publishing revenue, making the company vulnerable to economic trends in those markets. We are not confident that digital revenue growth will support editorial costs over the long term. We don't expect revenue growth to resume until the middle of 2012, when political advertising should pick up. We expect EBITDA to grow throughout 2012 as a result of cost cuts, especially if the company implements additional furloughs in 2012. For full-year 2012, we expect revenue to grow at a mid-single-digit percentage rate and EBITDA to grow at a high-teens rate. We expect that high-teens growth in TV broadcasting revenue will more than offset mid- to high-single-digit declines in print revenue. We estimate that growth in high-margin political advertising and retransmission revenues will lead to EBITDA margin expansion of about 200 basis points this year. For the fourth quarter of 2011, revenue and EBITDA declined 12% and 23%, respectively, because of much lower political advertising revenue and a continuation of decreases in newspaper publishing revenue. The EBITDA margin declined by 500 basis points from the same period last year, to 13.6%, despite a 4% reduction in operating expenses (excluding depreciation and amortization). The EBITDA margin is low compared with the peer average, especially considering the company's significant TV broadcasting business, which typically has a higher margin than newspaper publishing. As a result of declines in EBITDA, Media General's lease- and pension-adjusted debt to EBITDA increased to a steep 8.6x, from 5.9x a year earlier. Adjusted leverage is in line with leverage of greater than 5x, which is typical of a "highly leveraged" financial risk profile, according to our criteria. EBITDA coverage of interest for the same period was very thin, at 1.3x--down from 1.8x a year ago because of EBITDA declines. We expect lease- and pension-adjusted leverage to moderate to the mid-7x area in late 2012 and EBITDA coverage of interest to increase to the high-1x area. However, if interest expense goes up in conjunction with a bank loan amendment or refinancing, EBITDA coverage of interest would remain very thin. Pension plan contributions, interest expense, and capital spending exceeded Media General's EBITDA in 2011, limiting the company's capacity to repay debt. We expect the company to generate between $15 million to $25 million (or about 20% of EBITDA) of discretionary cash flow, and for pension contributions to consume about $13 million of cash. Ongoing structural pressures, particularly at the newspaper business, could continue to narrow discretionary cash flow, especially if refinancing or covenant amendments involve higher interest costs. Liquidity Media General has "less than adequate" sources of liquidity, in our view, because the company could breach its debt leverage covenant at the end of March. Our assessment of the company's liquidity profile incorporates the following assumptions and expectations: -- We expect sources of liquidity to exceed uses of liquidity by at least 1.2x over the next 12 months. In 2013, though, we expect uses to exceed sources, especially if the company's borrowing costs increase as a result of an amendment. -- The company's liquidity is constrained by a narrow margin of covenant compliance, which wouldn't survive a 10% to 15% EBITDA decline, when factoring in future covenant tightening. -- Debt maturities are nominal in 2011 and 2012, with no amortization on the company's term loan, but both the term loan and the revolving credit facility mature in 2013. Liquidity sources include cash balances of $23.1 million at Dec. 25, 2011, and our expectation of $35 million to $45 million in funds from operations in 2012. We expect that access to the company's $70 million revolver will be limited in 2012 because of covenants. Uses of liquidity include about $24 million of capital expenditures and $13 million of pension contributions in 2012. Under our base case assumptions, we expect discretionary cash flow in the range of $15 million to $25 million in 2012 before pension contributions. If the company's interest burden increases as a result of refinancing or amending its credit agreement, this number could be significantly lower. The company's credit agreement contains financial covenants, including fixed-charge and total leverage requirements. The company had a very narrow cushion of compliance with covenants as of Dec. 25, 2011. We believe that the company will need to refinance or again amend its credit agreement to avoid a covenant violation at the end of March. Recovery analysis For the complete recovery analysis, see Standard & Poor's recovery report on Media General, to be published on RatingsDirect as soon as possible following the release of this report. Outlook The negative outlook reflects the possibility that the company could violate covenants at the end of March if it is unable to amend covenants. We will closely monitor Media General's progress in selling its newspapers and obtaining an amendment to its bank facility credit agreement. We could lower the rating if the company doesn't make progress addressing covenant concerns over the month and we become convinced that a violation is imminent. An outlook revision to stable would likely entail the company amending its covenants to establish an appropriate cushion of compliance, at interest rates that the company can manage with EBITDA. Related Criteria And Research -- Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- How Standard & Poor's Uses Its 'CCC' Rating, Dec. 12, 2008 -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; Recovery Rating Revised To From Media General Inc. Corporate Credit Rating CCC+/Negative/-- Senior Secured CCC+ Recovery Rating 3 4 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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