TEXT-S&P: Lamar rating unaffected by REIT consideration
Aug 10 - Standard & Poor's Ratings Services said today that its 'BB-' rating and stable outlook on Baton Rouge, La.-based outdoor advertising operator Lamar Advertising Co. and its operating subsidiary, Lamar Media Corp. (Lamar), are not immediately affected by the company's announcement that it's considering converting into a real estate investment trust (REIT). Under a REIT structure, the company would be required to distribute 90% of taxable income to shareholders, which in our opinion could reduce financial flexibility. However, as of Dec. 31, 2011, the company had roughly $342.5 million and $458 million of Federal and state net operating loss carry forwards, respectively, to offset future taxable income. As a result, we believe the difference between the company's taxable income and free operating cash flow will continue to be meaningful over the foreseeable future, providing sufficient excess cash flow to repay debt and pursue investments and acquisitions. To qualify as a REIT effective Jan. 1, 2014, the company's target date, Lamar will be required to distribute to shareholders in a taxable distribution, its previously undistributed earnings and profits (E&P), attributable to taxable periods prior to Jan. 1, 2014. We are uncertain on the amount of this potential future obligation. Ratings could suffer if this distribution requires debt funding and results in increased leverage. Debt to EBITDA (adjusted for operating leases and asset retirement obligations) for the 12 months ended June 30, 2012, was still high at 5.5x--an improvement from 6x a year ago. Based on the company's plans to repay all or a portion of its 6.25% subordinated notes in 2012, we expect debt leverage to fall to about 5x by year-end, and potentially to the mid-4x area in 2013, assuming continued voluntary debt repayment and moderate EBITDA growth.
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