TEXT-S&P upgrades Media General to 'B-', outlook stable
Overview -- U.S. TV broadcaster Media General has signed an agreement to sell the Tampa Tribune, which will complete the company's planned sale of its newspaper assets. -- We now expect that the company will have sufficient liquidity to meet its interest coverage, pension contribution, and capital spending needs in 2013 despite much lower political advertising revenue. -- We are raising our corporate credit rating on Media General to 'B-' from 'CCC+'. The rating outlook is stable. -- The stable outlook reflects our view that the company will be able to maintain adequate liquidity barring unforeseen operating shortfalls, despite still very high debt leverage. Rating Action On Oct. 8, 2012, Standard & Poor's Ratings Services raised its rating on Richmond, Va.-based Media General Inc. to 'B-' from 'CCC+' and removed it from CreditWatch, where it was placed with positive implications on May 18, 2012. The rating outlook is stable. In addition, we raised our issue-level rating on the company's senior secured notes to 'B-' from 'CCC+' and removed it from CreditWatch in conjunction with the upgrade. Our recovery rating on this debt remains unchanged at '3', indicating our expectation of meaningful (50% to 70%) recovery for noteholders in the event of a payment default. Rationale The corporate credit rating on Media General is based on our expectation that the company will be able to maintain adequate liquidity despite its very high leverage. We consider the company's business risk profile "weak" (based on our criteria), reflecting the company's modest diversification and EBITDA margin that lags most peers'. Media General's pro forma ratio of lease-adjusted debt to EBITDA of 8.7x as of June 24, 2012 underpins our view of the company's financial risk profile as "highly leveraged." Media General operates a portfolio of 18 TV stations (indicating only modest diversification), with revenue concentration in NBC and CBS-affiliated stations. Its NBC and CBS affiliated stations account for roughly 60% and 30% of the company's revenues, respectively. This concentration leaves Media General vulnerable to declines in either of these networks' audience ratings. The company's advertising revenue is highly sensitive to economic downturns and election cycles. EBITDA can drop as much as 25% in nonelection years. Media General's pro forma EBITDA margin, at 26% as of June 24, 2012, lags its peers' and contributes to our assessment of the company's business risk profile as "weak." Despite the company's major network affiliations, its business is subject to long-term secular trends of fragmenting viewership and increasing audience engagement with Internet-based entertainment. Under our base-case scenario, we expect pro forma revenue to grow by roughly 25% in the second half of 2012, reflecting low-single-digit percent growth in core advertising, healthy growth in retransmission revenue, and a return of significant political advertising in the current presidential election year. We expect EBITDA to grow in excess of 40% in the second half of 2012 as a result of growth in high-margin political and retransmission revenue. In 2013, we expect revenue to decline at a mid-single-digit rate and EBITDA to decline by roughly 15%, with the decline in political advertising revenue more than offsetting low-single-digit growth in core local and national advertising revenue and further robust growth in retransmission revenue. The company's EBITDA margin, in our view, could expand to the high-20% area by the end of 2012, before contracting nearly 300 basis points (bps) in 2013. We expect television operating expenses will continue to grow at a low-single-digit rate, but that corporate expenses will decline in 2013 as the cost cuts taken in the second half of 2012 are realized. In the second quarter of 2012, Media General's revenue and EBITDA increased 17% and 67%, respectively, on a 4% increase in core ad revenue and robust growth in political and retransmission revenue. The company's pro forma EBITDA margin improved as a result of the company's sale of its lower-margin newspaper operations. However, at 26% for the 12 months ended June 24, 2012, its margin is below its TV broadcasting peers'. Media General's pro forma adjusted debt to EBITDA increased to 8.7x based on EBITDA as of June 24, 2012, from 7.1x in the same period last year, because the newspaper operations were sold at a very low multiple, in the mid-4x area on average. The company's adjusted debt to EBITDA is consistent with our financial risk indicative ratio of more than 5x for a "highly leveraged" financial profile. Media General's pro forma EBITDA coverage of interest for the 12 months ended June 24, 2012 remained thin at 1.2x, compared to 1.5x a year ago. We expect adjusted debt to EBITDA will moderate to the low-7x area by the end of 2012 and that EBITDA coverage of interest will improve to the mid-1x area because of an increase in retransmission and political advertising revenue. Both of these measures are likely to deteriorate again in 2013; accordingly, our rating is predicated on the company maintaining sufficient, albeit less than robust, near-term liquidity. Media General has manageable working capital and capital spending needs. The company's EBITDA conversion to discretionary cash flow should improve following the company's sale of the Tampa Tribune, which was a drain on cash flow. We expect the company to convert about 35% to 45% of EBITDA into discretionary cash flow in 2012, dropping to minimal levels in 2013. We expect cash interest, capital spending, and pension funding obligations to consume the majority of the company's EBITDA in 2013, and discretionary cash flow to turn negative because of lower election advertising. Liquidity Media General has "adequate" liquidity, in our view, to cover its needs over the next 12 to 18 months. Our assessment of the company's liquidity profile incorporates the following expectations and assumptions: -- We expect that the company's sources of liquidity over the next 12-18 months will exceed its uses by 1.2x or more. -- We expect that net sources would remain positive, even if EBITDA declines 15% to 20%. -- The company does not currently have financial covenant requirements, such as leverage or interest coverage covenants. -- Although Media General does not have any ongoing relationship with banks as a borrower, we believe that the company has a good relationship with BH Finance LLC, its term loan and revolver lender. Liquidity sources as of June 24, 2012 include cash balances of about $17 million and an unused $45 million revolving credit facility due 2020. We also expect the company to generate about $15 million to $25 million in funds from operations in 2013. Uses of liquidity include moderate working capital and capital spending needs of about $15 million combined, and pension funding obligations of about $4 million in 2013. Based on these expectations, we believe the company will generate negligible discretionary cash flow in 2013, and may need to draw on its cash balances. The company's senior secured notes mature in 2017 and its new (unrated) term loan matures in 2020. The term loan and revolver do not contain financial covenants. Recovery analysis For the recovery analysis, see Standard & Poor's recovery report on Media General, to be published on RatingsDirect as soon as possible following the release of this report. Outlook The stable rating outlook reflects our view that Media General's liquidity will remain adequate despite the company's high leverage. We regard an upgrade and downgrade as equally unlikely over the next year. That said, we could raise the rating over the intermediate term if we become convinced that the company will generate positive discretionary cash flow of at least $5 million and EBITDA coverage of interest of at least 1.3x in nonelection years. Again, we currently view this scenario as improbable, given our expectation that pension funding obligations will likely increase from the $4 million level that we are projecting in 2013. This scenario would likely involve the company growing core revenue at a mid-single-digit percent rate, along with robust growth in retransmission revenue and margin expansion of about 250 basis points. We could lower the rating if the company's liquidity deteriorates as a result of a reversal of revenue trends, causing cash balances to decline, discretionary cash flow to turn negative, leverage to climb higher, and liquidity to become "less than adequate." More specifically, we could lower the rating if it becomes apparent that EBITDA coverage of interest will fall below 1.2x. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011 -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 Ratings List Upgraded To From Media General Inc. Corporate Credit Rating B-/Stable/-- CCC+/Watch Pos/-- Senior Secured B- CCC+/Watch Pos Recovery Rating 3 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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