TEXT-S&P raises Barrington Broadcasting rating to 'B+'
Overview -- Performance has been solid at U.S. TV broadcaster Barrington Broadcasting LLC, and we expect credit metrics to improve in 2012, a presidential election year. -- We are raising our corporate credit rating on the company to 'B+' from 'B'. The rating outlook is stable. -- The stable outlook reflects our expectation that Barrington will be able to maintain an appropriate cushion of compliance with its covenants and reduce leverage with discretionary cash flow. Rating Action On April 27, 2012, Standard & Poor's Ratings Services raised its corporate rating on Hoffman Estates, Ill.-based TV broadcaster Barrington Broadcasting LLC to 'B+' from 'B'. The rating outlook is stable. All related issue-level ratings on the company's debt were also raised by one notch in conjunction with the upgrade, while all recovery ratings on the debt issues remain unchanged. Rationale The 'B+' corporate credit rating reflects Standard & Poor's expectation that Barrington will be able to maintain adequate liquidity and an appropriate cushion of compliance with its leverage covenant. Additionally, we expect continuing leverage reduction in 2012 due to debt repayment and EBITDA growth. We view Barrington's business risk profile as "weak" (as per our criteria) because of its narrow cash flow base concentrated in 15 small to midsize TV markets and competition from other major-network-affiliated TV stations that have parent companies with greater financial resources. We view Barrington's financial risk profile as "aggressive," based on its ratio of debt to average trailing-eight-quarter EBITDA of 5.0x as of Dec. 31, 2011, and its aggressive financial policy. Barrington's 24 TV stations operate in 15 small-to-midsize markets in the U.S. Such markets offer smaller total ad revenue and cash flow opportunities compared with top-100 markets, and typically attract considerably less national advertising, a source of revenue diversification. Barrington's advertising revenue is highly vulnerable to economic downturns and also varies with election cycles. EBITDA can decline by as much as 30% in nonelection years. The company's station affiliations are diversified across the four major networks, which limits exposure to individual network performance. Nevertheless, in our view, the company has limited growth potential because of its focus on small TV markets, the mature prospects of the local TV broadcasting business, and intensifying competition for audiences and advertisers from traditional and nontraditional media. Additionally, while no single market comprises more than 17% of net revenue, the company has a number of stations located in the Midwest, as well as other regions that have experienced greater economic pressure than the economy as a whole. Under our base-case scenario for 2012, a presidential election year, we expect revenue to grow at a mid-teens percentage rate and EBITDA to grow 25% or more due the return of significant political ad revenue, and low-single-digit growth of core ad revenue. We expect growth in high-margin political ad revenue to more than offset modest growth in operating expenses, resulting in an EBITDA margin in the mid-30% area. For the three months ended Dec. 31, 2011, revenue and EBITDA fell 20% and 33%, respectively, primarily because of lower political revenue. The EBITDA margin contracted to 32.7% for the 12 months ended Dec. 31, 2011, from 35.3% a year ago. The EBITDA margin decline was due to the absence of political revenue, partially offset by a workforce reduction and productivity gains from reengineering operations. For the 12 months ended Dec. 31, 2011, lease-adjusted debt to EBITDA increased to 5.4x, from 4.7x the year before, as a result of the lower EBITDA base in 2011, a nonelection year. Debt to average trailing-eight-quarter EBITDA, which smoothes the effects of election advertising and Olympics cycles, was 5.0x on Dec. 31, 2011. Leverage is at the high end of the 4x to 5x range that Standard & Poor's associates with an "aggressive" financial risk profile. However, we expect lease-adjusted leverage to fall to around 4x by the end of 2012 because of EBITDA growth and lower debt levels. On a trailing-eight-quarter basis, we expect leverage to fall to 4.5x or less. For the 12 months ended Dec. 31, 2011, EBITDA coverage of interest (adjusted for leases) was healthy, at 2.5x. We expect this metric to improve in 2012. We expect capital spending to stay roughly flat in 2012. Under our base case, Barrington will generate $25 million of discretionary cash flow for the full year of 2012 as result of manageable capital spending and working capital requirements. Liquidity In our view, Barrington has "adequate" liquidity to cover its needs over the next 12 to 18 months. Our view of the company's liquidity profile incorporates the following expectations and factors: -- We expect that the company's sources of liquidity to exceed its uses by 1.2x or more over the next 12 to 18 months. -- We expect that net sources would remain positive, even if EBITDA declines by 15%. -- We expect that the company would be able to maintain covenant compliance, even with a 15% decrease in EBITDA over the next 12 months. -- In our view, the company has the ability to absorb, with limited need for refinancing, low-probability, high-impact events over the next 12 months. Sources of liquidity consist of discretionary cash flow generation, full availability under its $10 million revolving credit facility, and cash balances of $12.7 million. Our base-case scenario assumes $25 million of discretionary cash flow in 2012. Primary uses of liquidity are manageable term loan amortization (about $2.5 million per year) and capital expenditures. Barrington had an adequate EBITDA cushion of compliance against its leverage covenant as of Dec. 31, 2011. The credit agreement's EBITDA definition uses average trailing-eight-quarter EBITDA. We believe the company will maintain adequate covenant compliance, despite the scheduled tightening of the company's leverage and EBITDA coverage of interest covenants. The leverage covenant tightens about 0.25x every year for the first three years, and faster after that. The covenant tightens to 5.25x from 5.50x on Dec. 31, 2012. Barrington's debt maturities are minimal until the term loan matures in 2017. The revolving credit facility matures in 2016. Recovery analysis For the complete recovery analysis, please see the report on Barrington Broadcasting LLC, to be published soon on RatingsDirect. Outlook The stable outlook reflects our expectation that the company will maintain an appropriate cushion of compliance with its total leverage covenant and reduce debt with discretionary cash flow through the 100% excess cash flow sweep. Still, we could lower the rating if operating performance deteriorates because of sharp declines in core advertising, leading to covenant headroom of 10% or less, negative discretionary cash flow, poor liquidity, or trailing-eight-quarter leverage above 5.0x. Other factors that could lead to a downgrade include the implementation of a debt-financed dividend. Although less likely, we could raise the rating if Barrington achieves increased geographic diversification and critical mass of EBITDA and discretionary cash flow, and commits to a less aggressive financial policy. Related Criteria And Research -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria For Rating The Television And Radio Broadcasting Industry, Dec. 11, 2009 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 Ratings List Upgraded To From Barrington Broadcasting LLC Corporate Credit Rating B+/Stable/-- B/Positive/-- Barrington Broadcasting Group LLC Senior Secured B+ B Recovery Rating 3 3