TEXT-S&P revises Media General recovery rating

Wed Feb 29, 2012 4:37pm EST

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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