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TEXT-S&P raises Nexstar Broadcasting Group to 'B+'
October 24, 2012 / 6:00 PM / 5 years ago

TEXT-S&P raises Nexstar Broadcasting Group to 'B+'

Overview
     -- U.S. TV broadcaster Nexstar Broadcasting Group plans to issue a new 
credit facility and new senior unsecured notes to finance its acquisition of 
12 TV stations owned by Newport Television Holdings and refinance current debt.
     -- We expect the stations that Nexstar will acquire from Newport 
Television will improve Nexstar's station portfolio and generate moderate cost 
synergies.
     -- We are raising our corporate credit rating on Nexstar to 'B+' from 
'B', rating the company's proposed credit facility 'BB' with a recovery rating 
of '1', and rating the new $200 million senior unsecured notes 'B-' with a 
recovery rating of '6'. 
     -- The stable rating outlook is based on our expectation that Nexstar 
will maintain a lease-adjusted debt to trailing-eight-quarter EBITDA ratio of 
6x or less over the intermediate term, along with adequate liquidity and an 
adequate amount of headroom with covenants.
 
Rating Action
On Oct. 24, 2012, Standard & Poor's Ratings Services raised its corporate 
credit rating on Irving, Texas-based Nexstar Broadcasting Group Inc. and on 
certain subsidiaries to 'B+' from 'B'. At the same time, we removed the rating 
from CreditWatch, where it was placed with positive implications on Oct. 5, 
2012. The rating outlook is stable.

At the same time, we assigned Nexstar's proposed $445 million senior secured 
credit facilities (expected to consist of a $95 million revolving credit 
facility due 2017 and a $350 million term loan due 2019) our 'BB' issue-level 
rating (two notches above our 'B+' corporate credit rating on the company), 
with a recovery rating of '1', indicating very high (90% to 100%) recovery in 
the event of a payment default.

We also assigned Nexstar's proposed $200 million senior unsecured notes due 
2020 our 'B-' issue-level rating (two notches lower than our 'B+' corporate 
credit rating on the company) with a recovery rating of '6' (0% to 10% 
recovery expectation). The ratings are based on the proposed terms and are 
subject to review upon receipt of final documentation.

The issue-level rating on the company's existing senior secured second-lien 
notes remains at 'B'. We revised the recovery rating on this debt to '5' (10% 
to 30% recovery expectation) from '4' based on the increased amount of 
first-lien debt in the capital structure.

We raised the issue-level rating on the existing senior secured credit 
facility to 'BB' from 'BB-'. The recovery rating on this debt remains 
unchanged at '1' (90% to 100% recovery expectation). We also raised the 
issue-level rating on the existing subordinated notes to 'B-' from 'CCC+'. The 
recovery rating on this debt remains unchanged at '6' (0% to 10% recovery 
expectation). We will withdraw the ratings on the existing senior secured 
credit facility and term loan once they are repaid with the proceeds from the 
proposed new issuance.

Rationale
The rating action reflects our view that the stations that Nexstar will 
acquire from Newport will improve the company's business risk profile and that 
trailing-eight-quarter leverage will improve to 6x or less over the 
intermediate term. The acquired stations will improve geographic and network 
affiliate diversity and also add stations in markets or states in which 
Nexstar is already present, allowing for cost synergies. Pro forma for the 
station acquisition, average trailing-eight-quarter leverage increases to 
about 6.2x, compared with 5.6x as of June 30, 2012. Our rating on Nexstar also 
reflects our assessment of the company's business risk profile as "fair" and 
its financial risk profile as "highly leveraged," based on our criteria. 

We view Nexstar's business risk profile as fair because of its relatively good 
EBITDA margin compared with peers', its position as a midsize TV broadcaster 
in relatively less competitive markets, its advertising revenue stream's 
vulnerability to economic downturns and the election cycle, and the structural 
issues that local TV broadcasting faces as a mature business. Factors in our 
assessment of Nexstar's financial risk profile include its high debt leverage 
and moderate EBITDA coverage of interest. The company's pro forma debt to 
average trailing-eight-quarter EBITDA in the low 6x area is in line with 
Standard & Poor's financial risk indicative ratios of greater than 5x for a 
highly leveraged financial risk profile.

Nexstar is a midsize local TV broadcaster with stations predominantly in small 
and midsize markets in the U.S. Pro forma for the Newport transaction, Nexstar 
will own and/or operate 68 television stations in 39 markets, reaching 
approximately 11.6% of all U.S. television households. Nexstar will have 
duopolies in 24 of 39 markets, which we believe allows for improved 
profitability. The company has historically had No. 1- or No. 2-rated local 
news programs in two-thirds of its markets. High news ratings indicate a 
superior brand franchise with local viewers, and also attract higher political 
advertising. Through the acquisition of the 12 Newport TV stations, Nexstar is 
entering into new TV markets in the states of Utah and Tennessee and also 
diversifying their network exposure by adding more ABC stations. The acquired 
stations include four duopolies, including Little Rock, Ark., where the 
company already operates two stations.

Nexstar's second-quarter 2012 results were in line with our expectations. 
Revenue and EBITDA grew by 18% and 35%, respectively, year over year, driven 
largely by strong growth in political ad revenue and retransmission fees. Core 
ad revenue grew by 6.7%, 2.2% on an unaffected same-station basis (excluding 
stations that changed their affiliation), as the largest category--auto 
advertising--rose 16%. At the same time, operating expenses increased 10.6% 
primarily due to expenses of the newly acquired stations and increase 
in-network affiliation fees resulting from the renewed network agreements 
entered into in 2011. For the 12 months ended June 30, 2012, Nexstar's EBITDA 
margin was 34.2%, only slightly down from 35.5% for the same period of 2011. 
Nexstar also generated discretionary cash flow of $47 million for the 12 
months ended June 30, 2012, relatively unchanged compared to last year. 
Conversion of EBITDA into discretionary cash flow was also healthy, at 41%.

We expect full-year 2012 revenue and EBITDA growth of around 20% and 45% to 
50%, respectively (not including the results of the Newport stations to be 
acquired). For 2013, we expect revenue to grow by 25% with the benefit of the 
Newport TV stations acquisition, offsetting lower political revenue. We expect 
core advertising growth of about 1% to 2%. However, we expect EBITDA growth to 
be relatively muted as incremental EBITDA from acquisitions is offset by the 
lack of high-margin political revenue. Pro forma for the Newport TV stations 
acquisition, we estimate that lease-adjusted average trailing-eight-quarter 
leverage was about 6.2x as of June 30, 2012. We expect pro forma average 
trailing-eight-quarter leverage to fall to 6x or less by the end of 2012 and 
to the mid-5x area in 2013.

In the 12 months ended June 30, 2012, the company generated discretionary cash 
flow of $47 million. We expect the company to generate over $60 million in 
discretionary cash flow for full year 2012. Pro-forma for the transaction, we 
expect discretionary cash flow to increase modestly in 2013, as increased cash 
interest expense, would be offset by incremental Newport TV stations' 
operating cash flows. We expect the conversion of EBITDA to discretionary cash 
flow to be in the low-40% range for the full-year 2012 and in 2013.

Liquidity
In our view, Nexstar has "adequate" sources of liquidity to cover its needs 
over the next 12 to 18 months, even in the event of moderate unforeseen EBITDA 
declines and factoring in the variability of revenue and EBITDA between 
election and nonelection years experienced by TV broadcasters. Our assessment 
of Nexstar's liquidity incorporates the following factors, expectations, and 
assumptions:
     -- We expect sources of liquidity over the next 12 to 18 months to exceed 
uses by over 1.5x. Debt maturities over this time are manageable, and can be 
covered with discretionary cash flow.
     -- We expect net sources to remain positive, even if EBITDA declines well 
in excess of 20%.
     -- Compliance with financial covenants could survive a 15% drop in 
EBITDA, in our view.
     -- Because of the company's good conversion of EBITDA to discretionary 
cash flow, we believe it could absorb low-probability, high-impact shocks.
     -- The company has good relationships with its banks, in our assessment, 
and has a satisfactory standing in the credit markets.
 
Liquidity sources include pro forma cash balances of $10 million to $20 
million, our expectation of more than $80 million of funds from operations in 
2012, and access to a new $95 million revolving credit facility maturing in 
2017. These sources will be more than sufficient to cover the company's modest 
working capital needs and capital expenditures of $15 million to $20 million. 
Pro forma for the new transaction, there are no significant maturities until 
2017, when the 8.875% senior secured second-lien notes mature. For 2012, we 
expect the company to generate about $60 million of discretionary cash flow. 
Going forward, we expect that cash flow will be used for acquisitions, returns 
to shareholders, and potentially some debt repayment.

We expect that the new credit agreement will include covenants on maximum 
total leverage covenant, maximum senior secured first-lien leverage, and 
minimum fixed-charge coverage. The total leverage covenant begins at 7.25x, 
steps down to 6.75x by December 2014 and to 6.5x by December 2015 and 
thereafter. The senior secured first-lien leverage and fixed-charge coverage 
covenants remain at 3.5x and 1.2x, respectively, through the term of the 
agreement. We expect that the company will maintain headroom of over 15% over 
the intermediate term, through the election cycle and including step-downs.

Recovery analysis
For the complete recovery analysis, please see our recovery report on Nexstar 
Broadcasting, to be published on RatingsDirect following this release.

Outlook
The stable outlook reflects that leverage will gradually moderate over the 
next few years and the company will maintain adequate liquidity and headroom 
with covenants. We could lower the rating if the company's debt to average 
trailing-eight-quarter EBITDA increases to the low-6x area or if the margin of 
compliance with the covenants drops below 15%. This could occur if EBITDA 
declines by 20% or more in 2013 (not including the pro forma EBITDA from the 
Newport Stations in 2012) or if the company pursues additional debt-financed 
acquisitions.

Although less likely, we could raise the rating over the intermediate-to-long 
term if we become convinced that the company will be able to reduce and 
maintain lease-adjusted leverage below 5x on a sustained basis and generate 
discretionary cash flow at levels similar to those of its 'BB-' rated peers.

Related Criteria And Research
     -- Methodology: 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
     -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade 
Credits, May 13, 2008
     -- 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
 
Ratings List

Upgraded
                                        To                 From
Nexstar Broadcasting Group Inc.
Nexstar Finance Holdings LLC
Nexstar Finance Holdings Inc.
Nexstar Broadcasting Inc.
 Corporate Credit Rating                B+/Stable/--       B/Watch Pos/--

Nexstar Broadcasting Inc.
Mission Broadcasting Inc.
 Senior Secured                         BB                 BB-/Watch Pos
   Recovery Rating                      1                  1

Nexstar Finance LLC
 Subordinated                           B-                 CCC+/Watch Pos
   Recovery Rating                      6                  6

New Rating

Nexstar Broadcasting Inc.
Mission Broadcasting Inc.
 Senior Secured
  $350M term loan B due 2019            BB                 
   Recovery Rating                      1                  
  $95M revolver due 2017                BB                 
   Recovery Rating                      1                  
 Subordinated
  $200M 7% nts due 2020                 B-                 
   Recovery Rating                      6                  

Ratings Affirmed; Recovery Ratings Revised
                                        To                 From
Nexstar Broadcasting Inc.
Mission Broadcasting Inc.
 Senior Secured
  Local Currency                        B                  B/Watch Pos
   Recovery Rating                      5                  4

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