Dec 10 -
Summary analysis -- dcp LLC --------------------------------------- 10-Dec-2012
CREDIT RATING: B/Watch Neg/-- Country: United States
Primary SIC: Television
Mult. CUSIP6: 23311U
Credit Rating History:
Local currency Foreign currency
02-Aug-2010 B/-- B/--
Standard & Poor's Ratings Services' rating on Santa Monica, Calif.-based TV production company dcp LLC, parent of Dick Clark Productions Inc., reflects the company's small portfolio of live-event, high-profile TV programming and high leverage. Standard & Poor's Ratings Services views the company's business risk profile as "weak" (based on our criteria), given its small program portfolio of only four major annual live TV programs and one TV series. Its weak EBITDA coverage of interest and high debt leverage underpin our assessment of its financial risk profile as "highly leveraged."
On Sept. 6, 2012, we placed the ratings on CreditWatch with negative implications following the announcement that a group of investors, including Guggenheim Partners, Mandalay Entertainment, and Mosaic Media Investment Partners, entered into a definitive agreement to purchase dcp from its current owner, RedZone Capital Management. The transaction closed on Sept. 28, 2012. Subsequently, the company offered to purchase all of the senior secured notes due 2015. The offer expired on Nov. 26, 2012, with no redemption requests. The ratings remain on CreditWatch pending clarification of the company's new capital structure and any shifts in business strategy.
The ratings reflect the risk that an unfavorable outcome of ongoing litigation with the Hollywood Foreign Press Assn. (HFPA) could hurt dcp's revenue and EBITDA. On Nov. 17, 2010, the HFPA filed a lawsuit accusing Dick Clark Productions of trying to misappropriate rights to the Golden Globe Awards program by unilaterally entering into a new broadcast contract with NBC. On April 30, 2012, the judge overseeing the case ruled in dcp's favor. However, on June 14, 2012, the HFPA filed a motion seeking an appeal of that ruling. That appeal has yet to be heard, although Dick Clark Productions has an agreement to produce The 70th Annual Golden Globe Awards on January 13, 2013. In our opinion, an unfavorable outcome for dcp could weaken the company's future revenue and EBITDA, given the Golden Globes' importance as one of the four key live TV events the company produces.
Most of the company's live TV events are aired once a year. Major programs include the "Golden Globe Awards," "American Music Awards," "Academy of Country Music Awards," "New Year's Rockin' Eve," and the series "So You Think You Can Dance." Live event programming typically attracts strong advertising, because fewer people record the shows to view them at a later date. As a result, networks can charge higher ad rates for those programs and are willing to pay sizable license fees to the production companies for the broadcast rights. Most of dcp's shows get good audience ratings in their time slots, but viewership has fluctuated over the past several years. Erosion of audience ratings over the long term could eventually hurt dcp's licensing fee revenue, though most contracts have recently been renewed at significantly higher fees for dcp. The company is planning to develop new programming and aims to increase the profitability of its current shows through increased sponsorships and ancillary events, in addition to higher licensing fees. The success of these initiatives is not predictable.
Our base-case scenario does not factor in any effect from a potential unfavorable outcome to the Golden Globes litigation. We estimate 3% revenue growth and over 25% EBITDA growth for the fiscal year ending June 30, 2013, mainly resulting from higher licensing fees on recent program renewals by the broadcast networks, higher ancillary revenues, and lower expenses as legal costs taper off.
In the first fiscal quarter ended Sept. 30, 2012, dcp's revenue grew 60% but EBITDA declined 19% year over year. New shows and fewer episodes of "So You Think You Can Dance" were the main factors in the revenue growth and EBITDA decline. For the 12 months ended Sept. 30, 2012, the EBITDA margin remained good at 28% but still lower than the 35% level of a few years ago. Fewer episodes of "So You Think You Can Dance," combined with higher costs, including legal expenses, have led to the lower margin. Without legal expenses, the EBITDA margin would have been at 31%. EBITDA coverage of interest for the 12 months ended Sept. 30, 2012, remained thin at 1.5x, and lease-adjusted debt to EBITDA remained high at 5.6x as of Sept. 30, 2012. Despite any changes to the company's capital structure because of its sale, we expect 2013 leverage to remain in the mid 5x area for interest coverage to remain around 1.5x. The company's leverage is consistent with the debt to EBITDA in excess of 5x threshold that we associate with a highly leveraged financial risk profile, based on our criteria. Conversion of EBITDA into discretionary cash flow modestly improved, to 40%, for the 12 months ended Sept. 30, 2012, versus 34% for the same period in 2011, driven by working capital improvements. We expect that, if the HFPA appeal goes forward, the continuing legal expenses could cause EBITDA conversion into discretionary cash flow to weaken somewhat over the next few quarters, but that discretionary cash flow will remain modestly positive.
We view dcp's liquidity as "adequate" to cover its needs over the next 12 to 18 months, but we could revise our view to "less than adequate" in the event of an adverse judgment in the Golden Globes litigation, which we cannot predict. Our assessment incorporates the following expectations and assumptions:
-- We expect sources of liquidity to exceed uses by more than 1.2x over the next 12 to 18 months.
-- Sources would exceed uses even if EBITDA declines 15%-20%.
-- We do not believe dcp has adequate protection against low-probability, high-impact developments, which could include an adverse litigation outcome.
-- The company does not currently have a credit facility, having repaid its previous facility with the proceeds of the notes issuance. However, the terms of the notes permit the company to enter into a secured credit facility of up to $15 million.
-- The company's main sources of liquidity are its cash balance ($28 million as of September 30, 2012) and modest discretionary cash flow.
Uses of cash are minimal over the next 12 to 18 months, consisting of working capital needs that typically peak in the latter part of the calendar year and minimal capital spending. There are no debt maturities until 2015. Nevertheless, we regard the absence of a revolving credit facility as indicating a high management tolerance for financial risk. There notes have a 5.5x incurrence covenant.
Our ratings on dcp remain on CreditWatch with negative implications. In resolving the CreditWatch listing, we will assess the company's new capital structure and any shifts in business strategy. If the 2015 senior notes are fully redeemed, we will withdraw the ratings on the notes. We expect that regardless of the ratings outcome, a stable outlook is only possible if the company's ongoing litigation with the Hollywood Foreign Press Association over the rights for the Golden Globe Awards is resolved in dcp's favor.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008