S&P base-case operating scenario
In our base-case assessment, we anticipate that revenue in 2012 will increase by 20%-25% year on year, driven primarily by the acquisition of DMX in March 2012. We estimate that, absent any acquisitions, organic percentage growth will be in the high single digits, on the basis of good first quarter results, decreasing churn rates, and encouraging pick up of visual products by clients in Europe. At the same time, we forecast a moderate contraction in the group’s pro forma adjusted EBITDA margin to about 29% from 30%, owing mainly to inclusion of DMX’s lower margin business. Over the medium term, we think that Mood Media should be able to maintain margin levels of 30% and above by increasing the share of products with higher average revenue per user and cost savings as a result of synergies.
In March 2012, Mood Media decided to dispose of its Mood Media Entertainment (MME) division, which generated revenue of $55.7 million and EBITDA of $11.2 million in 2011. The disposal, if successful, will have a positive margin impact. The group intends to dispose of MME within the next 12 months.
S&P base-case cash flow and capital-structure scenario
Mood Media has prudently funded the acquisitions of DMX and European audio-visual services provider BIS Group (BIS) with equity. As a result it has enlarged its earnings base while keeping an unchanged financial debt position, which will likely contribute to a noticeable improvement in financial metrics. Provided that the group maintains its focus on deleveraging and continues to avoid debt-funded acquisitions, we anticipate that Mood Media will likely achieve adjusted debt to EBITDA of about 4x and adjusted EBITDA interest coverage of about 3x for the year ending Dec. 31, 2012. We would consider this commensurate with an “aggressive” financial risk profile.
We anticipate further improvement in Mood Media’s credit metrics in 2013, in line with tightening covenant levels.
We view Mood Media’s liquidity as “adequate” as defined by our criteria, and we calculate that liquidity sources should exceed liquidity needs by more than 1.2x over the next 12 months.
As of March 31, 2012, we estimate liquidity sources to be about $170 million. These include:
-- Cash and cash equivalents of about $36 million;
-- Net proceeds of about $25 million from a private placement of common shares in May 2012;
-- A fully undrawn revolving credit facility of $20 million; and
-- Unadjusted funds from operations of $85 million-$90 million.
We estimate Mood Media’s liquidity needs over the next 12 months to be about $63 million. They comprise:
-- EUR22.5 million for the acquisition of BIS;
-- Capital expenditure of about $30 million; and
-- Working capital outflows of about $10 million.
As of March 31, 2012, the group had $470 million in financial debt outstanding. Mood Media’s loan facilities, in particular the revolving facility, start to mature in 2016. Beyond some debt repayments through a cash flow sweep, there are no meaningful debt maturities before this date.
Standard & Poor’s rates Mood Media’s first-lien senior secured debt ‘B’, in line with the corporate credit rating. The recovery rating is ‘3’, indicating our expectation of meaningful (50%-70%) recovery in an event of default. The senior secured debt comprises a $355 million term loan due 2018 and the $20 million revolving facility due 2016.
The issue rating on a $100 million second-lien senior secured term loan due 2018 is ‘CCC+’ (two notches below the corporate credit rating), with a ‘6’ recovery rating, indicating our expectation of negligible (0%-10%) recovery in an event of default.
We simulate a hypothetical default scenario resulting in default in 2015, principally due to competition from alternative media distribution models, poor execution of the Muzak and DMX integration, and a reduction in the number of customers (retail outlets) caused by a lengthy period of economic weakness.
Given Mood Media’s well-established market position and customer base, combined with the low recovery prospects if the group is liquidated, we believe debt holders would achieve the greatest recovery through a sale or restructuring of the business.
Our going-concern valuation yields a stressed enterprise value of about $290 million, which corresponds to a stressed EBITDA multiple of 5.0x. We have recently revised our stressed multiple from 4.5x to reflect Mood Media’s stronger market position following its recent acquisitions.
After accounting for a 7% reduction for estimated bankruptcy administrative expenses, we estimate a net value of about $270 million. On this basis, we see recovery in the 50%-70% range for first-lien senior secured lenders and 0%-10% for second-lien lenders.
We believe that further upside in the recovery prospects could come from a higher valuation as the business matures. However, the asset-light nature of the group is, in our view, a constraint on the recovery rating.
For our full recovery analysis, see “Mood Media Corp. Recovery Rating Profile”, published May 23, 2012 on RatingsDirect on the Global Credit Portal.
The positive outlook reflects our view that Mood Media will likely enhance its financial metrics, provided that it pursues a prudent financial policy and preserves its current adjusted EBITDA margin of about 30%. We could take a positive rating action if, under these circumstances, Mood Media achieves adjusted debt to EBITDA of about 4x and EBITDA interest coverage of about 3x on a sustainable basis and if its liquidity remains “adequate”, according to our classifications.
We could revise the outlook to stable if Mood Media’s financial metrics were to fall short of our expectations as a result of operating underperformance, as reflected by weakening profitability, further debt-funded external growth or similar signs of a looser financial policy, or a failure to successfully integrate new acquisitions.
Related Criteria And Research
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers’ Speculative-Grade Debt, Aug. 10, 2009