Jan 14 (Reuters) - Standard & Poor’s Ratings Services raised its corporate credit rating on Block Communications Inc. to ‘BB-’ from ‘B+'. The outlook is stable. At the same time, we raised the issue-level rating on the company’s $250 million of senior unsecured notes due 2020 to `BB-’ from ‘B+'. The recovery rating on that unsecured debt remains at `4’, indicating our expectation for average (30% to 50%) recovery of principal in the event of a payment default.
The ratings on Block Communications Inc, a privately held diversified media company, incorporate Standard & Poor’s Ratings Services’ view of a “fair” business risk profile and our expectation that the company will be able to maintain financial metrics consistent with an “aggressive” financial risk profile. We view Block’s small, but well-performing, core cable business as having a “satisfactory” business risk profile. Nonetheless, the overall business risk profile is dampened by the noncable units, particularly the newspaper segment, which generates material EBITDA deficits. We expect continued solid performance at the key, well-managed cable unit to effectively offset deterioration at the two daily newspapers, and enable Block to limit debt leverage (including our substantial adjustments) to around 4x and to maintain funds from operations (FFO) to debt of about 20%, both metrics fully supportive of an “aggressive” financial risk profile. We revised our assessment of Block’s liquidity to “strong” from “adequate” based on an absence of scheduled debt amortization through the 2020 maturity of its $250 million of unsecured notes; our expectation of annual FFO in the $70 million area; and substantial revolving credit capacity. To reported debt of about $250 million as of Sept 30, 2012, we add about $150 million of adjustments, mostly for retiree benefit obligations related to the newspaper segment.
Block’s cable operations, which contribute the bulk of consolidated cash flow, pass approximately 277,000 homes and serve about 140,000 basic video subscribers in metropolitan Toledo and Sandusky, Ohio. The cable unit continues to have above-industry-average operating metrics. Basic customer erosion of under 3% for the 12 months ended Sept 30, 2012, compares favorably with peers and is particularly noteworthy given that AT&T’s U-verse video service is available in much of Block’s cable service area. The company’s low-50% basic video penetration is substantially better than the industry’s 43.2% figure as of Sept. 30, 2012, reported by the National Cable and Telecommunication Assn. In addition, penetration of non-video revenue generating units (RGU), high-speed data, and telephone are favorable. The cable segment EBITDA of around 40% is in line with its much larger cable peers and notable because its lack of scale means it pays more for programming than large pay television providers. Notwithstanding a solid track record in running it cable properties, business risk for the cable segment is tempered lack of geographic diversity and scale.
We expect Block’s cable revenues to be in the low-$200 million area for 2012 and to show flat to modest growth in 2013 with increased average revenue per user (ARPU), including from growth in HSD and telephone RGUs, to somewhat more than offset a likely low-single-digit loss of basic video subscribers. We anticipate that the cable segment EBITDA margin will remain about 40%.
The company’s competitive local exchange carrier (CLEC), Buckeye Telesystems, contributes only about 7% of consolidated revenues; however, with an EBITDA margin of above 40%, its contribution is closer to 15% of consolidated EBITDA. The CLEC business benefits from operational synergies since it generally provides services in the same footprint as Block’s cable systems, but the business is significantly riskier than cable and its primary competitor is the much larger and financially stronger AT&T. The broadcasting segment consists of five full-power stations and a wide-coverage digital station, in second- and third-tier markets and include some major network affiliations. The stations benefited from election advertising in 2012 and we expect broadcasting to contribute in the neighborhood of 10% of both full-year consolidated revenues and EBITDA.
Publishing is by far the weakest of Block’s business segments. Revenues at the two daily newspapers owned by Block since the 1920s, the Pittsburgh Post-Gazette and Toledo Blade, mirror the declines of the newspaper industry and we expect continued drops in advertising lineage and circulation for both papers. We think that the newspapers will generate an EBITDA deficit of at least $15 million. Labor concessions in recent years resulted in significant savings at the newspaper segment including an approximate $60 million reduction in the retiree health care liability at the Post-Gazette. However, we do not believe that operating expense reductions can keep pace with revenue declines, and expect significant, ongoing negative EBITDA from the newspapers.
We have revised our assessment of Block’s liquidity to ”strong’ from “adequate”. In January 2012, Block refinanced all of its debt with $250 million of 7.25% unsecured notes with no scheduled amortization until the 2020 maturity. That transaction addressed the December 2012 maturity of the old term loan; further, as part of that refinancing, the revolving credit facility was increased by $25 million to $100 million and its maturity extended to 2016. Our liquidity assessment recognizes the good degree of revenue stability from the subscription-based business model of Block’s core cable business; lack of material debt maturities through 2020; largely predictable capital expenditures (mostly related to the cable segment; and significant revolving credit availability under covenants.
Sources of liquidity include availability under the $100 million revolving credit facility; a cash balance of around $30 million; and annual FFO in the $70 million area. Since the unsecured notes do not amortize, uses of liquidity will primarily be for annual capital expenditures that we expect to be near $50 million. We do not anticipate significant shares repurchases from Block family members. Our base-case scenario does incorporate increasing EBITDA deficits from the newspaper segment, which could exceed $20 million annually. Nevertheless, based on our current view of Block’s likely consolidated operating results, we expect that sources of liquidity will exceed uses by a ratio of at least 2x in 2013 and that ratio will be comfortably over 1.0x in 2014. Further, we expect sources of liquidity to exceed uses even if EBITDA were to decline by 30% below our base-case scenario. There is wide clearance on the financial covenants. We anticipate that the cable segment will continue to generate the bulk of Block’s EBITDA, with consolidated EBITDA, including the cash drain from newspapers, in the $100 million area.
For the recovery analysis, see, published on Jan. 12, 2012, on RatingsDirect.
The stable rating outlook largely reflects the good degree of revenue and cash flow visibility from the largely subscription-based business model of Block’s core cable-TV properties, which generate the bulk of consolidated EBITDA. That incorporates our two major expectations; first, that growth in non-video RGUs and ARPU at the cable segment will at least offset modest basic video customer losses, and second, that the newspaper segment will continue to post substantial EBITDA deficits. We expect Block’s debt leverage, including our adjustments, to be around 4x and FFO to debt to be about 20%; both metrics fully support an aggressive financial risk profile. Basic subscriber erosion in excess of low single digits in 2013 or EBITDA deficits at the newspaper segment in 2013 that are materially above $20 million, and resulted in debt leverage to above 5x on a consistent basis would lead to a rating downgrade. Conversely, we think it is highly unlikely that the company can curtail the secular decline of the newspaper business, at least over the next couple of years. Therefore, we expect continuing (and likely accelerating) cash consumption at the newspaper unit to effectively preclude consideration of a rating upgrade.
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
-- 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
Upgraded; Recovery Rating Unchanged
Block Communications Inc
Corporate Credit Rating BB-/Stable/-- B+/Stable/--
Senior Unsecured BB- B+
Recovery Rating 4 4