-- U.S. publisher American Media Inc.'s operating performance has been
weak, and we expect profitability to remain under pressure.
-- We are lowering our corporate credit rating on the company to 'CCC+'
-- The negative outlook reflects the potential for a further downgrade if
we become convinced that the company's discretionary cash flow will become
negative or the margin of compliance with its revolving credit facility senior
leverage covenant will deteriorate so that it will need an amendment, which
could be difficult to obtain.
On Jan. 18, 2013, Standard & Poor's Ratings Services lowered its corporate
credit rating on Boca Raton, Fla.-based American Media Inc. to 'CCC+ ' from
'B-'. The rating outlook is negative.
In conjunction with the downgrade, we are lowering the issue-level rating on
the first-lien notes to 'CCC+' from 'B-'. The recovery rating on this debt
remains '4', indicating our expectation for average (30% to 50%) recovery in
the event of a payment default. We are also lowering the issue-level rating on
the second-lien notes to 'CCC-' from 'CCC'. The recovery rating on this debt
remains '6', indicating our expectation for negligible (0% to 10%) recovery in
the event of a payment default.
American Media had total debt of $477 million on Sept. 30, 2012.
The downgrade conveys our expectation that continued declines in circulation
and advertising revenues will outweigh the company's cost reductions,
resulting in deteriorating operating performance, rising debt leverage, and
thinning discretionary cash flow. A key consideration is that the company has
a narrowing margin of compliance with its senior leverage covenant, which has
its final step down to 4.5x on Sept. 30, 2013. We believe that the company may
need an amendment to its revolving credit facility covenant by the end of the
2014, or possibly even sooner, which could be difficult to obtain. The company
relies on the revolving credit facility to fund its $28 million, semiannual
June and December interest payments on its $365 million 11.5% first-lien notes
due December 2017 and $104.9 million 13.5% second-lien notes due June 2018,
which are paid in seasonally weak first and third fiscal quarters.
The ratings on American Media reflect our expectation that leverage will
remain high and interest coverage will thin further. High leverage and weak
interest coverage metrics underpin our view of American Media's financial
profile as "highly leveraged," based on our criteria. We view the business
risk profile as "vulnerable," based on our expectations that the business will
remain highly competitive, operating diversity will stay limited, cyclicality
will persist, and adverse secular trends will remain a threat. We assess the
company's management and governance as "fair."
American Media is a magazine and tabloid publisher, producing titles such as
"Shape," "Star," and "The National Enquirer." Magazine publishing is highly
competitive, particularly in the areas of celebrity news and gossip. Some of
American Media's publications compete with magazines from larger,
better-capitalized companies. The industry faces difficult long-term
fundamentals because of competition from Internet-based media, where content
is often available to readers free of charge and barriers to entry are low. Ad
spending is also migrating online. Aside from structural issues, both
circulation and advertising revenue are vulnerable to economic cyclicality.
In our base-case scenario for the fiscal year ended March 31, 2014, we expect
revenue to decline at a mid-single-digit percentage pace because of ongoing
declines in advertising and circulation revenue. We expect EBITDA to fall at a
low-teen percentage rate because of our expectation that incremental cost
reduction measures may be increasingly difficult to realize. We also expect
the EBITDA margin to drop to roughly 17.5% in fiscal 2014 from our expected
level of 19% in fiscal 2013. Our fiscal 2014 base case suggests debt leverage
will rise to the low-8x area and interest coverage will thin to 1x.
For the three months ended Sept. 30, 2012, revenue and EBITDA dropped 14.3%
and 24.5%, respectively, as a result of a 26% fall in advertising revenue. Ad
revenue was impacted by a sharp decline in Shape magazine as a result of
sharply reduced print ad spending by beauty, packaged goods, and
pharmaceutical advertisers, continuing a trend of declining ad revenues at
Shape over the past few years. Total circulation revenue fell 7.3% as a
decline in higher-margin newsstand unit sales for the company's celebrity
titles outpaced cover price increases, which may further aggravate the decline
in unit circulation.
Debt to EBITDA (adjusted for operating leases and including restructuring
charges and amortization of deferred rack costs), increased to a very high
7.4x for the 12 months ended Sept. 30, 2012, from 5.9x over the prior 12
months. EBITDA coverage of interest expense thinned to 1.2x from 1.4x over the
same period. Leverage is in excess of the more than 5x adjusted debt-to-EBITDA
indicative threshold that we associate with a "highly leveraged" financial
risk profile. Discretionary cash flow increased to $37 million in the 12
months ended Sept. 30, 2012, from $13 million in the prior 12 months due to a
sharp reduction in trade receivables and inventories, which we do not believe
will reoccur. EBITDA conversion to discretionary cash flow was 54% in the 12
months ended Sept. 30, 2012, benefiting from positive working capital changes.
We expect discretionary cash flow to be roughly breakeven in fiscal 2014.
American Media has "less than adequate" sources of liquidity to cover its
needs over the next 12 to 18 months. Relevant expectations and assumptions in
our assessment of the company's liquidity profile include:
-- Because of the company's high debt burden and low expected
discretionary cash flow to total debt, we do not believe it can absorb
high-impact, low-probability shocks.
-- Compliance with maintenance covenants would not survive a greater than
15% drop in EBITDA given the step-down to 4.5x on Sept. 30, 2013.
-- In light of the low trading levels of its closely held debt issues, we
believe there is substantial refinancing risk.
Liquidity sources include a $40 million revolving credit facility (which had
$7 million drawn as of Sept. 30, 2012, compared with $12.5 million one year
ago) and a cash balance of $6.5 million as of Sept. 30, 2012. American Media
draws on the facility to service June and December secured note interest
payments, while reducing borrowings during seasonally strong quarters when no
interest payments are required. There are minimal debt maturities until the
revolving credit facility's maturity in December 2015. The $365 million
outstanding 11.5% first-lien notes due 2017 and the $104.9 million 13.5%
second-lien notes due 2018 are currently trading at a discount. We will
continue to monitor low trading levels of the company's secured notes, which
might suggest that a subpar exchange offer would be among alternatives that
management could consider to lower its interest burden. We would view such a
transaction as a selective default.
Senior debt to EBITDA, as defined in the credit agreement, is the only
maintenance financial test under its revolving credit facility--increased to
3.8x on Sept. 30, 2012, from 3.46x a year ago, narrowing the margin of
compliance with the 4.75x covenant to 20% from 27%. Under our base-case
scenario of a low double-digit decline in EBITDA in fiscal 2014, we estimate
the margin of compliance will be thin, at roughly 10% with the final covenant
step down to 4.5x on Sept. 30, 2013. We expect headroom will drop to roughly
5% at Dec. 31, 2013, reflecting the required borrowings to make the Dec. 15
$28 million in secured notes interest payments.
For the complete recovery analysis, see Standard & Poor's recovery report on
American Media, to be published on RatingsDirect following this report.
Our rating outlook on American Media is negative. We could lower the rating if
it becomes apparent that compliance with the senior debt covenant will become
severely compressed so that it will need an amendment, which could be
difficult to obtain. We could lower our rating if trends point to
discretionary cash flow turning negative in fiscal 2014, requiring increasing
revolving credit facility borrowings to fund semiannual secured note interest
payments. Specifically, this could occur if revenues decline at a mid- to
high-single-digit percentage rate and the EBITDA margin declines by 200 basis
points or more. Continuing structural pressures on American Media's
advertising and circulation revenue could contribute to such a scenario.
We regard a revision of the outlook to stable as a highly unlikely scenario,
involving consistent improvement in business trends and overall profitability,
and restoring a healthy margin of compliance with the senior leverage covenant.
Related Criteria And Research
-- Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct.
-- 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
American Media Inc.
Corporate Credit Rating CCC+/Negative/-- B-/Negative/--
First lien CCC+ B-
Recovery Rating 4 4
Second lien CCC- CCC
Recovery Rating 6 6