TEXT - Fitch rates Clear Channel Communications notes
Feb 22 - Fitch Ratings has assigned a 'CCC/RR4' rating to Channel Communications, Inc. (Clear Channel) $575 million senior secured priority guarantee note (PGN) due 2021. The notes will rank pari passu with the existing secured credit facilities and the existing secured PGN. Fitch currently has a 'CCC' Issuer Default Rating (IDR) on Clear Channel. A full list of ratings follows at the end of this release. Proceeds of the issuance, along with proceeds from borrowings under Clear Channel's receivable credit facility and cash on hand, will be used to repay the $847 million outstanding under the term loan A due in 2014. Fitch views the transaction favorably as a meaningful portion of the company's 2014 maturities are extended (remaining 2014 maturities are Clear Channel's $461 million of legacy notes). One negative of the transaction is the higher coupon on the new PGNs relative to the term loan, increasing annual interest expense by approximately $40 million. The bank debt and PGNs are secured by the capital stock of Clear Channel, Clear Channel's non-broadcasting assets (non-principal property), and a second priority lien on the broadcasting receivables that securitize the ABL facility. The bank debt and secured notes are guaranteed on a senior basis by Clear Channel Capital I, Inc. (holding company of Clear Channel), and by Clear Channel's wholly owned domestic subsidiaries. There is no guarantee from CCOH or its subsidiaries. The leveraged buyout (LBO) notes benefit from a guarantee from the same entities, although it is contractually subordinated to the secured debt guarantees. The legacy notes are not guaranteed. Clear Channel's Recovery Ratings reflect Fitch's expectation that the enterprise value of the company will be maximized in a restructuring scenario (going concern), rather than a liquidation. Fitch employs a 6x distressed enterprise value multiple reflecting the value of the company's radio broadcasting licenses in top U.S. markets. Fitch applies a 20% discount to Radio EBITDA. Fitch assumes that Clear Channel has maximized the debt-funded dividends from CCOH and used the proceeds to repay bank debt. Additionally, Fitch assumes that Clear Channel would receive 89% of the value of a sale of CCOH after the CCOH creditors had been repaid. Fitch estimates the adjusted distressed enterprise valuation in restructuring to be approximately $7 billion. The 'CCC' rating for the bank debt and secured notes reflects Fitch's belief that although the current recovery expectations are near the bottom of the 'RR3' (51%-70%) range, an 'RR4' (31%-50%) rating is appropriate given the complexity and uncertainty of the situation, and the proportion of secured debt in the capital structure. Fitch expects no recovery for the senior unsecured legacy notes and LBO notes due to their position below the banks in the capital structure, and they are assigned 'RR6'. However, Fitch rates the LBO notes 'CC' and the legacy notes 'C', given the formers' receipt of a subordinated guarantee and the latters' lack thereof. CCOH's Recovery Ratings also reflect Fitch's expectation that enterprise value would be maximized as a going concern. Fitch stresses outdoor EBITDA by 15%, to approximately the level where the company could not cover its fixed charges, and applies a 7x valuation multiple. Fitch estimates the enterprise value would be $3.9 billion. This indicates 100% recovery for the unsecured notes. However, Fitch notches the debt up only two notches from the IDR given the unsecured nature of the debt. In Fitch's analysis, the subordinated notes recover 36%, indicating 'RR4' and no notching from the IDR. There is little flexibility within the 'RR3' rating category in Fitch's view, and incremental debt could result in a downgrade of these notes. At Dec. 31, 2012, Clear Channel had $663 million of cash, excluding $562 million of cash held at CCOH. There is $729 million of CCOH funds swept to Clear Channel for cash management purposes. Clear Channel can access these funds and use them at its discretion, although they are due to CCOH on demand. Backup liquidity consists of an undrawn ABL facility maturing December 2017, subject to springing maturities. The ABL facility maturity date would be October 2015 if more than $500.0 million is outstanding under the term loan credit facilities; May 2016 if more than $500.0 million in aggregate is outstanding under the 10.75% senior cash pay notes due 2016 and 11.00%/11.75% senior toggle notes due 2016; and in the event that any of the afore mentioned debt is amended or refinanced to a maturity date that is before December 2017 and an aggregate amount of $500 million is outstanding, the maturity of the ABL facility will be one day prior to the maturity date of such debt. The ABL facility is subject to an undisclosed borrowing base; $321 million outstanding at first quarter 2011, the last reported date before the facility was repaid. FCF is limited and will decrease to approximately $100 million given higher interest expense. Substantially all FCF comes from CCOH. Fitch's ratings concerns center on the company's highly leveraged capital structure, with significant maturities in 2016 (approximately $10 billion); the considerable and growing interest burden that pressures FCF; technological threats and secular pressures in radio broadcasting; and the company's exposure to cyclical advertising revenue. The ratings are supported by the company's leading position in both the outdoor and radio industries, as well as the positive fundamentals and digital opportunities in the outdoor advertising space. Fitch estimates that total leverage was 11.4x at Dec. 31, 2012, with secured leverage of 7.1x. Fitch does not expect a material amount of total debt reduction over the next several years, given minimal consolidated FCF. Instead, Fitch expects the company to continue to focus on chipping away at its term loans via issuance at Clear Channel and CCOH. Pro forma for the new PGN issuance consolidated debt is $21.1 billion. Debt held at Clear Channel was $16.2 billion and consisted primarily of: --$8.2 billion secured term loans (B and C) maturing January 2016; --$4.3 billion secured PGNs, maturing 2019-2021; --$272 million ABL facility; --$796 million senior unsecured 10.75% cash pay notes, maturing August 2016; --$830 million senior unsecured 11%/11.75% PIK toggle notes, maturing August 2016; --$1.75 billion senior unsecured legacy notes, with maturities of 2014-2027. Sensitivities: Positive: Positive rating actions could result from a material reduction in secured leverage, as well as agreements with the term loan holders to extend a substantially larger portion of its term loan maturities long enough that Fitch believes the company will be better able to address them via a combination of cash payments, public debt, and refinancing of bank loans. Negative: A downgrade could result from prolonged consolidated cash burn, which would reduce Clear Channel's ability to fund near-term maturities. Additionally, cyclical or secular pressures on operating results that further weaken credit metrics, reducing the potential for refinancing/extension, could result in negative rating pressure. Lastly, indications that a DDE is probable in the near term would also drive a downgrade. Fitch currently rates Clear Channel and its subsidiary as follows: Clear Channel --Long-term IDR 'CCC'; --Senior secured term loans and senior secured revolving credit facility (RCF) 'CCC/RR4'; --Senior secured priority guarantee notes 'CCC/RR4'; --Senior unsecured LBO notes 'CC/RR6'; --Senior unsecured legacy notes 'C/RR6'. Clear Channel Worldwide Holdings, Inc. --Long-term IDR at 'B'; --Senior unsecured notes 'BB-/RR2'; --Senior subordinated notes 'B/RR4'. The Rating Outlook is Stable.
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