TEXT - S&P rates Wenner Media

Thu Dec 6, 2012 12:08pm EST

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Overview 
     -- U.S. magazine publisher Wenner Media is putting in place a $200 
million first-lien term loan to refinance its existing term loan.
     -- We are assigning our 'B' corporate credit rating to the company.
     -- We are assigning the first-lien term loan and revolving credit 
facility our 'B' issue-level rating with a recovery rating of '3'.
     -- The outlook is negative, reflecting our view that leverage will remain 
elevated as a result of unfavorable secular industry trends. 
 
Rating Action 
On Dec. 6, 2012, Standard & Poor's Ratings Services assigned its 'B' corporate 
credit rating to New York City-based Wenner Media LLC. The rating outlook is 
negative. 

At the same time we assigned our issue-level and recovery ratings to Wenner 
Media's $215 million first-lien credit facilities, consisting of a $15 million 
revolving credit facility due 2017 and a $200 million term loan B due 2017. We 
rated this debt 'B' (the same as the 'B' corporate credit rating on the 
company) with a recovery rating of '3', indicating our expectation of 
meaningful (50%-70%) recovery for lenders in the event of a payment default.

In addition, we assigned ratings to Wenner Media's existing $300 million ($194 
million outstanding) term loan B due 2013 and undrawn $25 million revolving 
credit facility due 2013. We rated this debt 'B' with a recovery rating of 
'3'. Proceeds will be used to refinance the company's existing term loan 
maturing October 2013. We expect to withdraw our ratings on this debt once the 
company's proposed refinancing transaction is closed.

Rationale 
The corporate credit rating on Wenner Media LLC reflects our expectation that 
leverage will remain high, given the structural pressures of declining 
newsstand and print advertising revenues facing the magazine publishing 
business. We see the risk that cost reductions may not fully offset the 
company's weak revenue trends, and earnings concentration in one publication 
also is a key risk. As a result, we view the company's business risk profile 
as "vulnerable" based on our criteria. Given its high debt leverage, resulting 
from its 2006 debt-financed acquisition of the remaining 50% stake in "US 
Weekly" that it did not own and prior executive compensation and dividend 
policy permitted under the existing credit agreement, we view the company's 
financial risk profile as "aggressive." The new credit agreement significantly 
lowers executive compensation and forbids distributions unless pro forma 
leverage is somewhat reduced. We assess management and governance as "fair," 
reflecting our view that there are significant risks relating to the company's 
private ownership.

Wenner depends on mature and cyclical print advertising revenues and newsstand 
magazine sales, all of which are in secular decline. "US Weekly" is the 
largest of Wenner's three magazines, accounting for nearly all of EBITDA. 
Strong competition in the celebrity magazine niche from other publishers, 
Internet content, and other entertainment sources is another key issue. Some 
of the company's publications compete with magazines from larger, 
better-capitalized publishers. Internet-based entertainment is steadily 
increasing, with content often available free of charge and low barriers to 
entry.

We expect that newsstand circulation will continue to decline over the near 
term due to continued competition from lower-price publications, TV and radio 
celebrity-oriented programming, and Web sites focusing on celebrity news. 
About 80% of US Weekly's circulation revenues and roughly 35% of its sales 
derive from high-margin newsstand sales, for which demand is largely 
impulse-driven, based on the magazine's cover. Rolling Stone, the company's 
second largest publication, has a lower margin due to its discounted 
subscriber base and small contribution from newsstand sales. The company's 
smallest publication, "Men's Journal," faces intense competition and has been 
persistently unprofitable due to its small contribution from circulation 
revenues, heavy competition in the men's lifestyle market, and negative 
fundamentals in the industry. 

Under our base-case scenario, we expect revenue and EBITDA to decline at a 
mid-single-digit percentage pace in 2013 because of ongoing declines in 
circulation and advertising revenue. We expect the company to maintain its 
EBITDA margin in the mid-teens area due to cost reductions. We expect debt 
leverage, adjusting for operating leases, to decline to the high-3x area in 
2013 due to debt reduction. Our base-case scenario indicates interest coverage 
could stay in the low- to mid-2x area in 2013.

For the three months ended Sept. 30, 2012, revenue declined 2%, while EBITDA 
increased 37% as a result of lower manufacturing, production and distribution, 
and overhead expenses. Pro forma lease-adjusted debt to EBITDA increased to 
4.3x from 3.9x for the 12 months ended Sept. 30, 2012, due to weaker operating 
performance. Pro forma EBITDA coverage of interest expense was 2.3x for the 12 
months ended Sept 30, 2012. We associate leverage between 4x and 5x with an 
"aggressive" financial profile, based on our criteria. Wenner Media generates 
moderate free operating cash flow because of low working capital requirements 
and capital expenditures. 

The company is owned and controlled by the founding CEO, and has periodically 
reduced dividend payments so that it could fund debt reduction. The company 
posted moderately negative discretionary cash flow for the 12 months ended 
Sept. 30, 2012, due to dividend payments. The conversion of EBITDA to free 
cash flow (before dividends) declined to roughly 30% in the 12 months ended 
Sept. 30, 2012, versus roughly 45% in the prior 12 months as a result of 
weaker operating performance. We anticipate that EBITDA conversion to 
discretionary cash flow will be around 30% in 2013 due to cost reductions and 
a sharp reduction in dividends, which are restricted by the credit agreement. 

Liquidity
Wenner Media's liquidity position is adequate for the next 12 months, in our 
view. Our assessment of the company's liquidity profile incorporates the 
following assumptions and factors:

     -- We expect the company's sources of liquidity over the next 12 to 18 
months will exceed its uses by more than 1.2x.
     -- We expect net sources to remain positive, even if EBITDA declines 15% 
to 20%.
     -- Compliance with the debt leverage covenant would survive a 15%-20% 
drop in EBITDA over the upcoming 12 months, a drop much in excess of 20%, 
which we do not anticipate will occur, could become problematic for the 
September 2013 and December 2014 covenant step-downs.
     -- The company has the capacity to absorb high-impact, low-probability 
shocks over the upcoming 12 months.
 
Liquidity sources include pro forma cash balances of $12.9 million at Sept. 
30, 2012, and a $15 million undrawn revolving credit facility, which we do not 
anticipate the company will need to draw over the intermediate term. We also 
expect discretionary cash flow of $15 million-$20 million in 2013. Debt 
maturities consist of $15 million in required annual amortization until the 
term matures in 2017; we expect amortization will be serviced with 
discretionary cash flow. The company is required to make mandatory prepayments 
of 100% of excess cash flow.

Under the term loan facility, the initial covenant of 4.75x steps down to 4.5x 
at March 31, 2013, 4.25x at Sept. 30, 2013, and 4.0x at Dec. 31, 2014. Pro 
forma debt leverage, as calculated by the bank agreement, was 3.9x at Sept. 
30, 2012. We expect the company to be able to maintain adequate headroom, 
despite periodic step-downs over the next few years, largely due to debt 
reduction. 

Recovery analysis
For the complete recovery analysis, see Standard & Poor's recovery report on 
Wenner Media to be published on RatingsDirect following the release of this 
report.

Outlook 
The negative outlook reflects our expectation that debt leverage will remain 
elevated over the coming year, as debt repayment and cost reductions may 
offset, in our view, ongoing weakening in business fundamentals. We could 
lower the corporate credit rating to 'B-' if a drop in EBITDA results in 
lease-adjusted debt leverage rising above 5.5x or if we become convinced that 
the margin of compliance with the leverage covenant will decline below 10%. 
This could occur if EBITDA falls by more than 15% over the next year, which 
could transpire if advertising and newsstand revenues deteriorate further 
without significant cost cuts. Additionally, we could lower the rating if the 
company is not successful at refinancing its debt over the near term. 

We could revise the outlook to stable if the company refinances its debt under 
favorable terms, improves operating performance, and maintains a cushion of 
compliance with its leverage covenant above 20%.

Related Research And Criteria
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings..., Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
 
Ratings List
Ratings Assigned
Wenner Media LLC
 Corporate credit rating                B/Negative/--
 Senior secured
  $200 mil. term loan B due 2017        B
    Recovery rating                     3
  $15 mil. revolver due 2017            B
    Recovery rating                     3
  $300 mil. term loan B due 2013        B
    Recovery rating                     3
  $25 mil. revolver due 2013            B
    Recovery rating                     3
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