TEXT-S&P revises Washington Post outlook to negative
May 21 - Overview -- Deteriorating operating performance at the Kaplan higher education division of U.S. media and education company Washington Post Co. is hurting consolidated revenues and EBITDA. -- We are revising our 'BBB+' rating outlook on the company to negative from stable. -- We expect the higher education segment's operating performance to remain depressed over the near-to-intermediate term, prompting our diminished assessment of the company's business mix and earnings potential. -- The negative rating outlook reflects our view that the company will face significant execution risks in stabilizing the businesses. Rating Action On May 21, 2012, Standard & Poor's Ratings Services affirmed its ratings, including the 'BBB+' long-term and 'A-2' short-term corporate credit ratings, on Washington, D.C.-based Washington Post Co. At the same time, we revised the rating outlook to negative from stable. Total debt outstanding at March 31, 2012, was $456 million. Rationale The outlook revision reflects our concern that operating performance and discretionary cash flow will remain depressed as a result of a more difficult regulatory structure affecting the higher education division, as well as our expectation that continued sharp declines in newspaper advertising revenues will outweigh the company's cost reduction measures. The company has experienced sharply negative year-over-year trends in new student enrollment and profitability since 2010, as a result of U.S. Department of Education (DoE) regulations that significantly tighten marketing practices and set limits on the ratio of student loan debt to discretionary income. Also, the company is implementing measures to reduce student loan default rates and revising its business practices to comply with regulations that have resulted in lower enrollment levels. Our ratings on Washington Post Co. rely on the relative strength of the company's cable and broadcasting businesses, low debt leverage, and ample excess liquidity. While we do not anticipate significant weakening of the company's leverage or liquidity, we expect that education segment revenue trends could continue to deteriorate, primarily as a result of declining enrollments, the DoE's tighter regulation of for-profit education companies, and, longer term, the possible vulnerability of federal student loan funding. We also see the potential for ongoing erosion of newspaper advertising and circulation revenues. These risks could undermine the company's business mix, earnings, and discretionary cash flow potential. We view Washington Post Co.'s business risk profile as "fair", mainly reflecting our view that the broadcasting and cable businesses offer an element of stability to profitability and cash flow that temper the unfavorable fundamentals of the education and newspaper businesses. The company has a "modest" financial risk profile, in our view, because of low debt leverage and excess cash and investments. The company's cable and broadcasting operations provide modest diversification, although they face a variety of long-term risks. Cable operations, accounting for roughly 45% of EBITDA, have a solid competitive position in smaller communities in 19 Midwestern, Western, and Southern states. Growth in high-speed data and telephony services since 2008 has been more than offset by basic and digital subscriber erosion, resulting from increased satellite and digital subscriber-line competition. Operating performance of the broadcasting segment's group of six top-50 market TV stations (accounting for nearly one- quarter of EBITDA) is cyclical and sensitive to the timing of elections, but generates good cash flow. The company's newspaper operations largely consist of its flagship newspaper, The Washington Post, which is minimally profitable, despite cost reductions, due to the secular decline in print advertising revenues. We believe that the unit is unlikely to restore satisfactory profitability, as additional cost cuts may be insufficient to offset long-term pressures of readership declines and advertising moving online. Under our base-case scenario, we expect consolidated revenues to decline at a low- to mid-single-digit percentage rate and that EBITDA could decline at a mid-single-digit percentage pace in 2012, with a continued decline in education and newspaper operations more than offsetting broadcasting segment benefits of election advertising. We expect that cable segment operating performance may decline modestly due to increased video programming and sales costs. In 2013 we expect consolidated revenues to decline at a low- to mid-single-digit percentage rate, and that EBITDA could decline at a mid- to high-single-digit percentage pace, stemming from a continued decline in education and newspaper operations and the absence of election revenues impacting broadcasting performance. Revenues declined 6.6% in the three months ended March 31, 2012, while EBITDA fell 32.5%, largely as a result of a sharp 18% drop in student enrollment, declining cable TV performance, and a 17% fall-off in newspaper print advertising revenues. The EBITDA margin declined to 13.6% in the 12 months ended March 31, 2012, from 17.9% over the prior 12 months, and we expect that they will remain flat in 2012 due to increased political advertising impacting the television broadcasting segment. We expect that lease- and pension-adjusted debt leverage could rise to 2.0x in 2012 and 2.2x in 2013. We associate leverage between 1.5x and 2.0x with a modest financial risk profile, based on our criteria. We expect that lease-adjusted EBITDA coverage of gross interest expense could decline to about 7x in 2012 and the mid- to high-6x range in 2013. We believe that EBITDA conversion to discretionary cash flow will remain depressed around 15% in 2012 and 2013 due to the depressed contribution from the education segment. Lease-adjusted debt to EBITDA increased to 1.9x for the 12 months ended March 31, 2012, from 1.2x in the prior 12 months. Lease-adjusted EBITDA coverage of gross interest expense declined to roughly 8x from 12x over the same period. Conversion of EBITDA to discretionary cash flow fell to roughly 25% for the 12 months ended March 31, 2012, from over 40% in 2008-2009 because of weaker operating performance. Liquidity Our short-term rating on Washington Post Co. is 'A-2'. The company has "strong" liquidity, in our view, which would more than cover its needs over the next 12 to 18 months, and which could withstand sharp unforeseen EBITDA declines. Our assessment of its liquidity profile includes the following expectations, assumptions, and factors: -- We expect that the company's sources of liquidity (including cash and facility availability) will exceed its uses by 2x or more over the next 12 to 18 months. -- There are no debt maturities over the next 12 months. -- We expect that net sources will be positive over the next 12 months, even with a hypothetical EBITDA decline exceeding 50%. -- The company has a considerable cushion of compliance with its $1.5 billion minimum consolidated shareholders' equity covenant. -- The company has well-established and solid relationships with its banks, in our assessment, and has a generally high standing in the credit markets. Washington Post Co.'s liquidity sources include cash balances of $295 million and marketable securities of $403 million as of March 31, 2012. The company also had $321 million in investments in marketable equity securities recorded as available for sale. We believe these investments are nonstrategic and consider them a potential source of liquidity, subject to taxable gains. Cash and investment balances were $698 million as of March 31, 2012. In September 2011, the company authorized the repurchase of an additional 750,000 shares (roughly $250 million at current market prices), though it did not announce a target pace of purchases or envisioned completion date. We anticipate that the company's liquidity will not meaningfully deteriorate. We believe that discretionary cash flow will remain depressed at roughly $100 million in 2012, as a result of the effect of weak education segment operating performance and cable capital spending requirements. In addition, the dividend, which accounts for about one-third of operating cash flow, was increased 4% for 2012 despite the reduction in profitability. At March 31, 2012, Washington Post Co. had full availability of its $450 million revolving credit facilities due June 2015, while its AUS$50 million facility due June 2015, which is used to hedge Australian operations, was fully drawn. The U.S. revolving credit provides back-up to the company's commercial paper program. Roughly $110 million in commercial paper was outstanding as of Dec. 31, 2011, which was subsequently repaid with cash. We expect that the company may access the commercial paper market in the fourth quarter of 2012 for seasonal working capital needs. Washington Post Co. has only a minimum consolidated shareholders' equity covenant of $1.5 billion, which does not change over the life of the U.S. revolving credit agreement. At March 31, 2012, the company had equity of $2.63 billion, providing a 75% margin of compliance. Long-term public debt maturities are minimal until 2019, when the company's $400 million 7.25% senior notes mature. Outlook The negative outlook reflects the potential long-term impact of regulation on the higher education segment's enrollment levels and cash flow, unfavorable structural trends in newspaper publishing, and the possibility of further declines in cable TV cash flow that would otherwise help compensate. We could lower the rating if it becomes apparent that the company's operating performance will continue to deteriorate. This could occur if meaningful enrollment declines continue without the prospect for reversal, or losses resume in the newspaper segment, resulting in further contraction of the EBITDA margin and an increase in debt leverage. Also, a significant reduction in the company's excess liquidity--which we do not currently expect--resulting from large share repurchases or acquisitions, could pressure the ratings. We could revise the outlook to stable if it appears that enrollment trends have stabilized, leading to revenue and EBITDA growth on a sustained basis. Related Criteria And Research -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 Ratings List Ratings affirmed; Outlook revised To From Washington Post Co. Corporate credit rating BBB+/Negative/A-2 BBB+/Stable/A-2 Ratings affirmed Washington Post Co. Senior unsecured BBB+ 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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