-- We expect Dallas-based TV broadcaster Belo Corp. to reduce its
eight-quarter trailing debt leverage to less than 4x following the redemption
of its 2013 notes at the end of November.
-- We are raising our ratings on the company, including the corporate
credit rating, to 'BB' from 'BB-'.
-- The stable outlook reflects our expectation that Belo will maintain
its leverage on a trailing-eight-quarter EBITDA basis below 4x for the next
two years and maintain its EBITDA margin above 30%, with adequate liquidity
over the intermediate term.
On Nov. 19, 2012, Standard & Poor's Ratings Services raised its ratings on
Dallas-based TV broadcaster Belo Corp., including the corporate credit rating,
to 'BB' from 'BB-'. At the same time, we are maintaining our stable rating
outlook on the company.
The rating action reflects our expectation that Belo will reduce its
eight-quarter trailing debt leverage to less than 4x with the redemption of
its 6.75% senior notes at the end of November and will maintain leverage below
4x over at least the next two years.
The rating reflects Belo's geographic and revenue concentration in Texas, and
our assumption that the company's TV stations will maintain good audience
ratings compared with local competitors. Belo has a "satisfactory" business
risk profile, based on our criteria, because of its strong local market
positions, diversified network affiliations, and high EBITDA margin. Belo's
financial risk profile is "significant," in our view, as we expect the company
to maintain its adjusted debt to latest-eight-quarter EBITDA ratio at less
than 4x. As of Sept. 30, 2012, leverage, adjusted for pension costs and
operating leases, was 4.1x, but will decline to about 3.6x with the redemption
of the 2013 senior notes and modest draw-down of the $200 million revolver.
Belo owns 20 TV stations in 15 large and midsize TV markets, reaching about
14% of U.S. TV households. The company operates more than one station in six
of its markets--a structure that generates operating efficiencies. Most of
Belo's TV stations rank first or second in audience ratings for their local
news broadcasts. This competitive positioning is important to attracting
political advertising. However, the company's four TV stations in Texas
contribute 41% of total revenue, which we regard as a geographic concentration
Under our base-case assumptions for 2013, we expect revenue to decline by 4%
due to the absence of political ad revenue and the Olympics. Core local and
national ad revenue should grow at a low single-digit percent rate, modestly
higher than S&P's 1.8% growth forecast for GDP. Assuming low-single-digit
percentage growth in expenses because of good management of corporate and
station operating costs, this would result in a mid-teens percent decline in
EBITDA and the EBITDA margin contracting to around 31%, from 2012's estimated
In the third quarter of 2012, revenue and EBITDA grew 16% and 49%,
respectively, year over year because of a 5% increase in core ad revenue and
significantly higher political ad revenue. Growth in EBITDA was attributable
to political revenues falling to the bottom line as well as the company
keeping cost growth to under 5%. The EBITDA margin for the 12 months ended
Sept. 30, 2012, was strong at 35%, over 200 basis points higher than for the
same period last year.
Lease-adjusted debt to last-12-months' EBITDA was aggressive at 4x as of Sept.
30, 2012. We expect this ratio to decline to about 3.4x with the redemption of
the 2013 senior notes and modest draw down of the $200 million revolver to
fund the redemption and the special dividend. We expect the ratio will
continue to decline to the low-3x area by 2014, spurred by EBITDA growth.
Using a debt to average trailing-eight-quarter EBITDA ratio to smooth the
differences between election and nonelection years, Belo's debt leverage was
4.1x as of September 30, 2012, down from 5.5x at the end of 2009. Pro forma
for the redemption and revolver drawdown, we expect this ratio to decline to
about 3.6x. This is in line with Standard & Poor's financial risk indicative
ratio of 3x to 4x debt to EBITDA for a significant financial risk profile. We
expect the average trailing-eight-quarter debt to EBITDA ratio will remain in
the mid-3x area through 2014.
The company continues to have good discretionary cash flow generating ability.
EBITDA conversion into discretionary cash flow has averaged above 50% for the
last two quarters as the company has benefited from strong political
advertising. We expect discretionary cash flow will decline in 2013 due to
lower profitability (in a nonelection year), and increased dividends.
Belo's liquidity is "adequate," in our view, and will more than cover its
needs in the near-to-intermediate term, even with a mid-teen percentage EBITDA
decline in 2013, a nonelection year. Our view of the company's liquidity
profile incorporates the following expectations and assumptions:
-- We expect sources to cover uses by 1.2x or more over the next 12 to 18
-- We also expect that net sources would be positive, even with a 30%
drop in EBITDA.
-- Belo had a 35% EBITDA cushion against the financial covenants
governing its revolving credit facility as of June 30, 2012, giving it
sufficient headroom for a 15% to 20% EBITDA decline without breaching
-- Because of Belo's generally good conversion of EBITDA to discretionary
cash flow, we believe it could absorb high-risk, low-probability shocks with
limited need for refinancing.
-- In our opinion, the company has a generally satisfactory standing in
the credit markets and established relationships with its banks.
-- In our assessment, management attempts to anticipate setbacks and
proactively takes actions necessary to ensure continued strong liquidity.
Liquidity sources include cash balances of roughly $166 million as of Sept.
30, 2012 (though much of this will be used to redeem the 2013 notes) and our
expectation of about $30 million of discretionary cash flow in 2013. Belo
currently has full borrowing availability under its $200 million revolving
credit facility due Aug. 15, 2016. The $176 million of senior notes due May
2013 will be redeemed on Nov. 30, 2012. The $271.4 million of senior notes due
November 2016 are callable beginning November 2013.
Principal uses of liquidity are annual dividends of about $35 million and
modest annual capital spending requirements of about $20 million. Belo
reinstated its shareholder dividend in early 2011, after a nearly two-year
suspension because of the recession's effect on its cash flow and credit
measures. Even with the reinstatement of dividends, we expect conversion of
EBITDA into discretionary cash flow will be satisfactory over the next 12 to
24 months, at around 25% to 30%.
For the complete recovery analysis, please see Standard & Poor's recovery
report on Belo, published June 11, 2012, on RatingsDirect.
The stable rating outlook reflects our expectation that Belo will maintain its
debt to trailing-eight-quarter EBITDA below 4x, its EBITDA margin above 30%,
and adequate liquidity for its expected needs, over the intermediate term.
It is unlikely that we would raise the rating over the intermediate term given
the company's heavy concentration of cash flow from Texas and small scale of
operations elsewhere. We could consider an upgrade if the company broadens its
base of operations while preserving good profitability measures, and adopts a
more conservative financial policy, with leverage of less than 3x on an
average trailing-eight-quarter EBITDA basis.
Alternatively, we could lower the rating if the company adopts a more
aggressive financial policy that increases leverage to above 4x on a sustained
basis through large debt-financed acquisitions, or pursues
shareholder-favoring initiatives such as large share repurchases and special
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- 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
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Corporate Credit Rating BB/Stable/-- BB-/Stable/--
Senior Unsecured BB BB-
Recovery Rating 4 4
Subordinated BB BB-
Recovery Rating 3 3