Overview -- Based on slower-than-anticipated growth in local and national ad revenues for 2012 and still aggressive debt balances, we expect U.S. TV broadcaster Belo's average eight-quarter trailing debt leverage ratio will remain above the 4x debt leverage threshold for an upgrade in 2012. -- We are affirming our ratings on Belo, including the 'BB-' corporate credit rating. -- We are revising our rating outlook to stable from positive, reflecting our revised expectations. Rating Action On June 11, 2012, Standard & Poor's Ratings Services affirmed all ratings, including the 'BB-' corporate credit rating, on Dallas-based TV broadcaster Belo Corp. At the same time, we revised our rating outlook on the company to stable from positive. Rationale The outlook revision reflect our view that lower-than-expected percentage growth in local and national ad revenues, combined with a single-digit increase in operating expenses will result in a longer time horizon for Belo's average eight-quarter trailing debt leverage ratio to reach the 4x threshold ratio for an upgrade. The rating affirmation reflects Belo's geographic and revenue concentration in Texas, and our assumption that the company's TV stations will maintain good audience ratings compared with local competitors. Belo has a "satisfactory" business risk profile, based on our criteria, because of its strong local market positions, diversified network affiliations, and high EBITDA margin. Belo's financial risk profile is "aggressive," in our view, because of its still-elevated adjusted debt to latest-12-month EBITDA ratio. As of March 31, 2012, leverage, adjusted for pension costs and operating leases, was 4.6x. Belo owns 20 TV stations in 15 large and midsize TV markets, reaching about 14% of U.S. TV households. The company operates more than one station in six of its markets--a structure that generates operating efficiencies. Most of Belo's TV stations rank first or second in audience ratings for their local news broadcasts. This competitive positioning is important to attracting political advertising. However, the company's four TV stations in Texas contribute 41% of total revenue, which we regard as a geographic concentration risk. Under our revised assumptions for 2012, we expect revenue to grow by 9% due to increased political ad revenue in a presidential election year, and low-single-digit percentage growth in core local and national ad revenue. Assuming low-single-digit percentage growth in expenses because of good management of corporate and station operating costs, this would result in an 18% increase in EBITDA and EBITDA margin expansion to around 34%, from 2011's 31.5% level. In the first quarter of 2012, revenue and EBITDA grew 2.9% and 14.6%, respectively, year over year because of a 1% increase in core ad revenue, a $1.7 million contribution from the Super Bowl, and higher political ad revenue. The double-digit EBITDA percentage growth reflects a 10% decrease in syndicated programming expenses compared with last year due to the conclusion of the "Oprah Winfrey Show" in May 2011. The EBITDA margin for the 12 months ended March 31, 2012 was strong at 32%, but down from 34% for the same period last year. The ratio of lease-adjusted debt to EBITDA remains aggressive at 4.6x as of March 31, 2012, although down from 6.7x at the end of 2009. We expect the ratio will continue to decline to less than 4.0x by 2014 with EBITDA growth. Using a debt to average trailing-eight-quarter EBITDA ratio to smooth the differences between election and nonelection years, Belo's debt leverage was 4.4x as of March 31, 2012, down from 5.5x at the end of 2009. This is in line with Standard & Poor's financial risk indicative ratio of 4x to 5x debt to EBITDA for an aggressive financial risk profile. We expect the average trailing-eight-quarter debt to EBITDA ratio will decline to 4.3x at the end of 2012 and to 3.7x in 2013. The improvement in 2013 stems from our expectations that Belo will refinance its 6.75% notes due 2013 with mainly cash and some revolver borrowings. We do not incorporate the benefit of this into the rating until it occurs. The company continues to have good discretionary cash flow generating ability. EBITDA conversion into discretionary cash flow has averaged in the mid-40% area over the past year. Discretionary cash flow declined modestly in 2011 because of lower EBITDA and the reinstatement of dividends, but remains satisfactory, in our opinion. We expect the company to generate similar levels of discretionary cash flow in 2012 due to higher profitability, partially offset by the increased dividend. Liquidity Belo's liquidity is "adequate," in our view, and will more than cover its needs in the near-to-intermediate term, even with a midteen percentage EBITDA decline in 2013, a nonelection year. Our view of the company's liquidity profile incorporates the following expectations, assumptions, and factors: -- We expect sources to cover uses by 1.2x or moreover the next 12 to 18 months. -- We also expect that net sources would be positive, even with a 30% drop in EBITDA. -- Belo had a 31% EBITDA cushion against the financial covenants governing its revolving credit facility as of March 31, 2012, giving the company sufficient headroom for EBITDA to decline by 15% to 20% without breaching covenants. -- Because of Belo's generally good conversion of EBITDA to discretionary cash flow, we believe it could absorb high-risk, low-probability shocks with limited need for refinancing. -- In our opinion, the company has a generally satisfactory standing in the credit markets and established relationships with its banks. -- In our assessment, management attempts to anticipate setbacks and proactively takes actions necessary to ensure continued strong liquidity. Liquidity sources include cash balances of roughly $120 million as of March 31, 2012, including $30 million of income tax refund, and our expectation of about $60 million of discretionary cash flow in 2012 and 2013. Belo currently has full borrowing availability under its $200 million revolving credit facility due Aug. 15, 2016. Belo amended and restated its revolving credit facility in December 2011, and reduced the facility size by $5 million. The amended agreement also includes up to $150 million of incremental commitments. The company also has about $176 million of senior notes due May 2013. The $271.4 million of senior notes due Nov. 15, 2016, are callable beginning November 2013. Principal uses of liquidity are annual dividends of about $35 million and modest annual capital spending requirements of about $20 million. Belo reinstated its shareholder dividend in early 2011, after a nearly two-year suspension because of the recession. Even with the reinstatement of dividends, we expect conversion of EBITDA into discretionary cash flow will be satisfactory over the next 12 to 24 months, at around 25%-30%. Recovery analysis For the complete recovery analysis, please see Standard & Poor's recovery report on Belo, to be published shortly, on RatingsDirect. Outlook The stable rating outlook reflects our view that Belo will continue to reduce leverage on a trailing-eight-quarter EBITDA basis toward 4x over the next year and maintain EBITDA margins above 30% and adequate liquidity over the intermediate term. We expect the company will refinance its 6.75% notes due 2013 mainly with cash and some revolver borrowings. We could raise the rating if the debt leverage improves to less than 4x on an average trailing-eight-quarter basis. While this could happen through organic EBITDA growth over the intermediate term, more likely, leverage improvement would result from debt repayment. Alternatively, although this is a less likely scenario, we could lower the rating if the current trends in ad revenue reverse, causing EBITDA declines of more than 20% and resulting in the cushion of covenant compliance to approach 10%. Additionally, we could lower the rating if the company adopts a more aggressive financial policy that increases leverage through large debt-financed acquisitions, or shareholder-favoring initiatives such as large share repurchases and special dividends. Research Contributor: Samantha Stone, New York 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 -- 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; Outlook Action To From Belo Corp. Corporate Credit Rating BB-/Stable/-- BB-/Positive/-- Ratings Affirmed; Recovery Ratings Unchanged Belo Corp. Senior Unsecured BB- Recovery Rating 4 Subordinated BB- Recovery Rating 3 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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