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TEXT-S&P summary: LIN TV Corp.
Under our base case scenario for 2012 (excluding the impact of the New Vision TV transaction), we expect LIN's revenue to grow at a high-teens percentage rate and EBITDA to rise by 25% to 30%, driven by sharp increases in political ad revenue and retransmission fees from recently renewed carriage contracts, despite only low-single-digit percent growth in core ad revenue. We also expect moderate EBITDA margin expansion, which is likely to be more evident in election years, as the proportion of political advertising in the revenue mix is relatively high for LIN compared to its peers, leading to moderate revenue and EBITDA variability between election and nonelection years.
In the quarter ended March 31, 2012, revenue and EBITDA grew 15% and 23%, respectively, driven largely by strong growth in retransmission fees and interactive revenues. Core ad revenue grew 6%, as the largest category--auto advertising--was up 15%. For the 12 months ended on March 31, 2012, the EBITDA margin was 30%, down from 33% for the same period in 2011, as the full benefit of high-margin presidential and local political ad revenue will be concentrated in the second half of this year.
In 2011, LIN and NBC Universal (NBCU) extended $12.2 million of shortfall loans to their joint venture, Station Venture Holdings LLC, so the venture could fund its interest payments. LIN contributed $2.5 million, its 20% share of debt service shortfalls. The joint-venture shortfall agreement between LIN and NBC Universal's 49% owner, General Electric Co., has been extended to April 1, 2013, because the joint venture is unlikely to cover its 2012 interest expense on its own. We view GE as having some incentive to continue its support because GE Capital Corp. is the sole lender in the venture's $815.5 million debt maturing 2023. Although Comcast Corp., NBCU's 51% owner, does not support the venture, the venture's two stations in Dallas and San Diego are important NBC affiliates. LIN estimates its share of shortfalls loans will be about $4 million during 2012 and into 2013. We believe LIN's $815.5 million guarantee of the debt of its joint venture with NBC Universal is a significant financial risk for the company; we therefore consolidate a portion of the joint venture debt in determining LIN's credit measures. We add $296 million in incremental debt, which is the present value of the guaranteed debt ($815.5 million), less an assumption of joint-venture station proceeds based on a conservative 6.5x multiple (relating to a hypothetical joint-venture distressed scenario) of trailing eight-quarters' joint-venture EBITDA.
As of March 31, 2012, LIN's debt (adjusted for leases, pensions, and contingent joint-venture obligations) to EBITDA ratio was highly leveraged, at 7.5x (up from 6.8x one year ago). Pro forma for the New Vision TV stations acquisition, we expect this metric to rise above 8x. Using average trailing-eight-quarter EBITDA to smooth the differences between election and nonelection years, LIN's lease-adjusted debt to EBITDA was still highly leveraged, at 7.2x, but down from 7.5x a year ago. EBITDA coverage of interest was relatively unchanged, at 2.6x. Pro forma for the New Vision TV transaction, fully adjusted leverage, on a trailing-four-quarter EBITDA basis, could improve to about 6x at the end of 2012. We expect interest coverage to fluctuate between 2.5x and 3.5x, as EBITDA varies during the election cycle.
For the 12 months ended March 31, 2012, LIN TV's discretionary cash flow declined to $35 million, compared with $75 million one year ago. Conversion of EBITDA into discretionary cash flow also fell to 27%, from 52% one year ago, caused by higher levels of negative working capital and capital expenditures. Despite higher capital spending forecasted for 2012, we expect discretionary cash flow to more than double in 2012 (to $70 million-$80 million) from 2011 levels with the return of political ad revenue and sharply higher retransmission fees.
Based on our criteria, LIN's sources of liquidity are adequate to cover uses over the next 12 to 18 months. Our assessment of its liquidity profile incorporates the following factors, expectations, and assumptions:
-- We expect sources of liquidity over the next 12 to 18 months to exceed uses by at least 1.2x. This assumes LIN can re-finance its $265 million bridge loan.
-- We expect net sources to be positive, even if EBITDA drops 25%, which is normal for a local TV broadcaster in an odd-numbered nonelection year.
-- Compliance with financial covenants could survive a 20% drop in EBITDA, in our view.
-- We believe LIN has a somewhat diminished ability to absorb, with limited need for refinancing, low-probability, high-impact events over the next 12 months. Our view is based on LIN's guarantee of $815.5 million joint-venture debt and the venture's dependence on its two key investors for liquidity support.
-- LIN has good relationships with its banks, in our assessment, and a good standing in the capital markets.
Liquidity sources as of March 31, 2012, included cash balances of $12.7 million, availability of $65 million under its revolving credit facility (which matures in October 2016), and our expectation of more than $120 million of funds from operations in 2012. These liquidity sources will be more than sufficient to fund working capital needs, annual capital expenditures of between $20 million and $25 million (per our assumptions), and debt maturities of about 12 million over the next two years, consisting mainly of scheduled term loan amortizations. We expect LIN to generate $70 million to $80 million of discretionary cash flow in 2012, mainly when political ad revenue peaks in the second half of the year, declining to about $65 million in 2013.
LIN TV's credit facilities contain total leverage and senior leverage covenants and also an interest coverage covenant. It had a 23% EBITDA cushion against its 6.00x consolidated leverage covenant, a 25% EBITDA cushion against its 4.00x senior leverage covenant, and a 24% EBITDA cushion against its 2.25x interest coverage covenant as of March 31, 2012. The senior leverage covenant tightens more sharply than the other two tests, from 4.00x to 3.00x by the end of 2012 and we expect LIN to face modest covenant compliance pressures, particularly in non-election years. However, it should still be able to maintain adequate covenant headroom through the election cycle.
For the complete recovery analysis, please see Standard & Poor's recovery report on LIN TV, to be published following this report on RatingsDirect.
The stable rating outlook reflects our expectation that LIN's operating performance will improve in 2012, enabling it to make progress in further reducing its leverage so that fully adjusted debt (including leases, pensions, and off-balance sheet obligations) to EBITDA could improve to 6x by the end of the year. We could raise the rating if we believe LIN can maintain this leverage metric below 8x (and its lease-adjusted debt to average trailing-eight-quarter EBITDA below 6x) throughout the election cycle and if the joint venture is able to improve its operating performance to the extent that it no longer requires shortfall loans. Conversely, we could lower our rating if revenue and EBITDA falter because a derailing of the economic recovery reverses core ad revenue growth, resulting in strained liquidity; or if the operating performance of its joint venture with NBCU continues to deteriorate, thereby requiring LIN to substantially increase its support through shortfall loans and funding; or if GE decides to no longer provide financial support to the joint venture.
Related Criteria And Research
-- Methodology And Assumptions: 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
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
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