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Overview -- U.S.-based radio broadcaster Radio One Inc. has amended its credit agreement to provide covenant relief in 2013 and 2014. -- We are revising our 'B-' rating outlook on the company to stable from negative and affirming the ratings on the company, including the 'B-' corporate credit rating. -- The stable outlook reflects our expectation that the company will maintain an adequate margin of compliance with financial covenants under the amended credit agreement, despite continued high debt leverage and thin EBITDA coverage of total interest expense. Rating Action On Dec. 21, 2012, Standard & Poor's Ratings Services revised its 'B-' rating outlook on Lanham, Md.-based radio broadcaster Radio One Inc. to stable from negative. At the same time, we affirmed all ratings on the company, including the 'B-' corporate credit rating. Rationale The 'B-' rating and outlook revision to stable reflect our view that Radio One should be able to maintain adequate liquidity and a 15% margin of compliance with financial covenants under the amended credit agreement over the next 12-18 months. The amendment widens the total debt leverage, secured debt leverage, and interest coverage covenants, and increases the amount of cash the company can net against debt for covenant compliance by $10 million, to $35 million. In 2012, the company elected to receive less than the maximum possible cash distributions from 50.9%-owned TV One, which will increase in 2013, providing additional headroom against EBITDA declines for covenant compliance purposes. Nevertheless, we see credit metrics remaining at levels consistent with a "highly leveraged" (in excess of 5x debt to EBITDA) financial risk profile because of the company's very high debt leverage of roughly 9x and its thin interest coverage. Radio One's business profile is "weak" because of its exposure to advertising cyclicality, the potential for longer-term structural declines in radio, revenue concentration in a few markets, and decreased profitability at Reach Media. These factors more than offset the benefit of the company's 50.9% ownership in TV One. Our governance assessment is "fair." Radio Broadcaster Radio One targets the African-American audience, and owns 54 radio stations in 16 of the top 50 African-American markets. Within its radio segment, revenues are concentrated among four markets: Houston; Washington, D.C.; Atlanta; and Baltimore, which together account for 54.5% of radio revenue. It has good positions in most of its markets, and its radio segment EBITDA margin is comparable to those of peers. Nevertheless, we view radio as subject to long-term decline because of advertising migration online and audience migration to alternative audio entertainment. TV One adds business diversity and access to a more stable revenue stream, because affiliate fees are subject to long-term contracts with annual escalators. Radio One has a 53.5% ownership interest in Reach Media Inc., a programming syndication business that, in our opinion, now operates with relatively weak profitability because of declining demand for syndicated radio programming, together with fixed costs for talent and entertainment. Interactive One is the company's online unit, which we expect to generate modest EBITDA in 2012 following losses and heavy investments over the past three years. The interactive segment contributes less than 5% of total revenue for the company. Under our base-case scenario, we believe total revenue could increase at a mid-single-digit percent rate in 2013 mainly resulting from mid-teens percent revenue growth at TV One. Excluding TV One, we believe core radio revenue, which accounts for roughly 80% of total revenue, will decline at a low-single-digit percent rate in 2013, partially offset by low-double-digit percent revenue growth at the interactive segment. We expect a low-single-digit percent revenue increase at Reach Media due to normalized comparisons, its new affiliation agreement with Radio One. Sustainable revenue growth in 2013 will depend on the economy and the company's ability to maintain positive operating momentum in markets such as Houston, where its station in late 2011 launched an expensive all-news FM format. Excluding TV One and assuming low-single-digit percentage growth in expenses, we expect 2013 EBITDA to decline at a mid-single-digit percent rate and the EBITDA margin to contract by roughly 100 basis points from the 2012 estimated 21.7% level. In the third quarter of 2012, revenues increased 5.3% year over year while EBITDA (excluding stock-based compensation) increased 26.8%, reflecting lower corporate expenses and higher profitability at TV One and the core radio business. Core radio revenue grew 5.3% year over year, reflecting benefits of reformatting changes in 2011. Revenue at Reach Media declined 11.3% for the quarter, reflecting lower affiliate fees due to the new agreement between Radio One and Reach Media effective Jan. 1, 2012, and lower event sponsorship revenue. On a consolidated basis, the company faced easier comparisons in radio for much of 2012 due to costs incurred from reformatting stations in 2011. For the quarter, revenue at TV One increased 12.5%, reflecting increased advertising revenue. Under its new majority owner and management, TV One increased programming investment in 2012, which started to benefit advertising revenue. The company's EBITDA margin (deconsolidating TV One, but including dividends received) was healthy at 27% for the 12 months ended Sept. 30, 2012, up considerably from 25.5% in 2011. The company's cash interest expense will further increase over the next 12 months, as a result of the notes going cash pay underscoring the company's need for consistent EBITDA growth and ongoing cash distributions from TV One. In addition to the covenant amendment, the company elected to receive less than the maximum possible cash distributions from TV One in 2012, which will roll over in 2013, providing an additional cushion against EBITDA declines in 2013. The company converted 23.1% of EBITDA to discretionary cash flow over the 12 months ended Sept. 30, 2012, nearly doubling its 2011 discretionary cash flow. Key contributors to this were working capital as a source of cash, and lower capital expenditures and dividends, despite higher interest expense associated with the March 2011 refinancing. The company began paying cash interest on its 12.5%/15.0% senior subordinated notes on May 15, 2012, after electing to pay interest with additional notes since November 2010 (cash interest was payable at a rate of 6% plus the 9% accrued when paying in kind for a total of 15%) and is now payable in cash at a rate of 12.5%. The outstanding balance on the subordinated notes was roughly $327 million on Sept. 30, 2012, amounting to 40% of its total debt. As a result, annual cash interest expense on these notes will roughly double in 2013 further burdening interest coverage. Under our base-case scenario, we expect the company to report a decline in lease-adjusted leverage to about 8x in 2012, benefiting from the consolidation of TV One, the boost from political ad revenue, and modestly positive EBITDA at the interactive segment. In 2013, we expect leverage to remain high around 8x. As of Sept. 30, 2012, lease-adjusted debt to EBITDA (deconsolidating TV One and including dividends received) was very high, at 9x, down from 9.4x at 2011 year-end. EBITDA coverage of total interest expense was extremely thin, at 1x as of Sept. 30, 2012, while coverage of cash interest was somewhat better at 1.5x. The company's cash interest expense likely will increase next year, underscoring the company's need for consistent EBITDA growth and ongoing cash distributions from TV One. In 2013, we expect interest coverage will remain around 1x. Liquidity In our opinion, Radio One has adequate liquidity, but we could revise our assessment to less than adequate if operating trends weaken or if discretionary cash flow becomes negative. Our assessment incorporates the following expectations and assumptions: -- We expect sources of liquidity over the next 12 months to cover uses by 1.2x or more. -- Net sources would be positive, even with a 15% drop in EBITDA over the next 12 months, but net sources could swing negative without a rebound from this drop. -- Radio One has sufficient covenant headroom for EBITDA to decline by 15% without the company breaching coverage tests. -- The company has a sound relationship with banks. Sources of liquidity over the next 12 months include $26.4 million of cash as of Sept. 30, 2012 (excluding $22.2 million of cash at TV One), and access to $23.9 million under the revolving credit facility due March 31, 2015. Under our base-case scenario, we believe discretionary cash flow could turn negative in 2013 because of a full year of cash interest payments on the 12.5%/15.0% senior subordinated notes. There is an annual put obligation for the noncontrolling equity in Reach Media that, in early 2012, was extended to February 2013. We believe there is a possibility that the put could be further extended if the company and the minority holders do not negotiate a favorable agreement. Thus, we believe that this obligation may be manageable to a degree. Radio One's amended credit agreement contains financial covenants consisting of a total leverage, a secured debt leverage, and an interest coverage ratio covenant with scheduled step-downs. We expect the company to have adequate headroom against the amended financial covenants over the near to intermediate term. The amended credit agreement also allows Radio to net out $35 million of cash for compliance purposes, up from $25 million prior to the amendment. There are no meaningful debt maturities in the next 12 months. Outlook The rating outlook is stable. We expect Radio One will maintain an adequate margin of compliance with financial covenants under the amended credit agreement and sufficient liquidity for near-term operating needs. We could revise the outlook to negative or lower the rating over the next 12 to 18 months if EBITDA declines at a low-single-digit percent rate from trailing-12-month levels with no prospect of a turnaround or if discretionary cash flow swings negative. This scenario could occur if there is a reversal in operating trends in the radio group due to weak ad demand and higher marketing and programming expenses to support station reformatting changes, and if these changes more than offset increased cash distributions from TV One. We regard an upgrade as a remote possibility, which would likely entail performance at the radio segment and Reach Media that is better than our expectations, allowing the company to generate substantial discretionary cash flow and increase EBITDA coverage of total interest expense to the mid-1x area on a sustainable basis. 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 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 Ratings List Ratings Affirmed; Outlook Revision To From Radio One Inc. Corporate Credit Rating B-/Stable/-- B-/Negative/-- Ratings Affirmed Radio One Inc. Senior Secured B+ Recovery Rating 1 Subordinated CCC Recovery Rating 6
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Sept 29 Wells Fargo & Co's Chief Executive John Stumpf returns to Capitol Hill on Thursday with his job still under threat and the bank facing rising political pressure over a sales scandal that has become a major issue in Washington and on Wall Street.