June 11, 2012 / 6:06 PM / 6 years ago

TEXT-S&P revises Belo outlook to stable from positive

Overview	
     -- Based on slower-than-anticipated growth in local and national ad 	
revenues for 2012 and still aggressive debt balances, we expect U.S. TV 	
broadcaster Belo's average eight-quarter trailing debt leverage ratio will 	
remain above the 4x debt leverage threshold for an upgrade in 2012. 	
     -- We are affirming our ratings on Belo, including the 'BB-' corporate 	
credit rating.	
     -- We are revising our rating outlook to stable from positive, reflecting 	
our revised expectations.	
	
Rating Action	
On June 11, 2012, Standard & Poor's Ratings Services affirmed all ratings, 	
including the 'BB-' corporate credit rating, on Dallas-based TV broadcaster 	
Belo Corp. At the same time, we revised our rating outlook on the
company to stable from positive.	
	
Rationale	
The outlook revision reflect our view that lower-than-expected percentage 	
growth in local and national ad revenues, combined with a single-digit 	
increase in operating expenses will result in a longer time horizon for Belo's 	
average eight-quarter trailing debt leverage ratio to reach the 4x threshold 	
ratio for an upgrade. The rating affirmation reflects Belo's geographic and 	
revenue concentration in Texas, and our assumption that the company's TV 	
stations will maintain good audience ratings compared with local competitors. 	
Belo has a "satisfactory" business risk profile, based on our criteria, 	
because of its strong local market positions, diversified network 	
affiliations, and high EBITDA margin. Belo's financial risk profile is 	
"aggressive," in our view, because of its still-elevated adjusted debt to 	
latest-12-month EBITDA ratio. As of March 31, 2012, leverage, adjusted for 	
pension costs and operating leases, was 4.6x.	
	
Belo owns 20 TV stations in 15 large and midsize TV markets, reaching about 	
14% of U.S. TV households. The company operates more than one station in six 	
of its markets--a structure that generates operating efficiencies. Most of 	
Belo's TV stations rank first or second in audience ratings for their local 	
news broadcasts. This competitive positioning is important to attracting 	
political advertising. However, the company's four TV stations in Texas 	
contribute 41% of total revenue, which we regard as a geographic concentration 	
risk.	
	
Under our revised assumptions for 2012, we expect revenue to grow by 9% due to 	
increased political ad revenue in a presidential election year, and 	
low-single-digit percentage growth in core local and national ad revenue. 	
Assuming low-single-digit percentage growth in expenses because of good 	
management of corporate and station operating costs, this would result in an 	
18% increase in EBITDA and EBITDA margin expansion to around 34%, from 2011's 	
31.5% level.	
	
In the first quarter of 2012, revenue and EBITDA grew 2.9% and 14.6%, 	
respectively, year over year because of a 1% increase in core ad revenue, a 	
$1.7 million contribution from the Super Bowl, and higher political ad 	
revenue. The double-digit EBITDA percentage growth reflects a 10% decrease in 	
syndicated programming expenses compared with last year due to the conclusion 	
of the "Oprah Winfrey Show" in May 2011. The EBITDA margin for the 12 months 	
ended March 31, 2012 was strong at 32%, but down from 34% for the same period 	
last year. 	
	
The ratio of lease-adjusted debt to EBITDA remains aggressive at 4.6x as of 	
March 31, 2012, although down from 6.7x at the end of 2009. We expect the 	
ratio will continue to decline to less than 4.0x by 2014 with EBITDA growth. 	
Using a debt to average trailing-eight-quarter EBITDA ratio to smooth the 	
differences between election and nonelection years, Belo's debt leverage was 	
4.4x as of March 31, 2012, down from 5.5x at the end of 2009. This is in line 	
with Standard & Poor's financial risk indicative ratio of 4x to 5x debt to 	
EBITDA for an aggressive financial risk profile. We expect the average 	
trailing-eight-quarter debt to EBITDA ratio will decline to 4.3x at the end of 	
2012 and to 3.7x in 2013. The improvement in 2013 stems from our expectations 	
that Belo will refinance its 6.75% notes due 2013 with mainly cash and some 	
revolver borrowings. We do not incorporate the benefit of this into the rating 	
until it occurs.	
	
The company continues to have good discretionary cash flow generating ability. 	
EBITDA conversion into discretionary cash flow has averaged in the mid-40% 	
area over the past year. Discretionary cash flow declined modestly in 2011 	
because of lower EBITDA and the reinstatement of dividends, but remains 	
satisfactory, in our opinion. We expect the company to generate similar levels 	
of discretionary cash flow in 2012 due to higher profitability, partially 	
offset by the increased dividend.	
	
Liquidity	
Belo's liquidity is "adequate," in our view, and will more than cover its 	
needs in the near-to-intermediate term, even with a midteen percentage EBITDA 	
decline in 2013, a nonelection year. Our view of the company's liquidity 	
profile incorporates the following expectations, assumptions, and factors:	
     -- We expect sources to cover uses by 1.2x or moreover the next 12 to 18 	
months.	
     -- We also expect that net sources would be positive, even with a 30% 	
drop in EBITDA.	
     -- Belo had a 31% EBITDA cushion against the financial covenants 	
governing its revolving credit facility as of March 31, 2012, giving the 	
company sufficient headroom for EBITDA to decline by 15% to 20% without 	
breaching covenants. 	
     -- Because of Belo's generally good conversion of EBITDA to discretionary 	
cash flow, we believe it could absorb high-risk, low-probability shocks with 	
limited need for refinancing.	
     -- In our opinion, the company has a generally satisfactory standing in 	
the credit markets and established relationships with its banks.	
     -- In our assessment, management attempts to anticipate setbacks and 	
proactively takes actions necessary to ensure continued strong liquidity.	
	
Liquidity sources include cash balances of roughly $120 million as of March 	
31, 2012, including $30 million of income tax refund, and our expectation of 	
about $60 million of discretionary cash flow in 2012 and 2013. Belo currently 	
has full borrowing availability under its $200 million revolving credit 	
facility due Aug. 15, 2016. Belo amended and restated its revolving credit 	
facility in December 2011, and reduced the facility size by $5 million. The 	
amended agreement also includes up to $150 million of incremental commitments. 	
The company also has about $176 million of senior notes due May 2013. The 	
$271.4 million of senior notes due Nov. 15, 2016, are callable beginning 	
November 2013.	
	
Principal uses of liquidity are annual dividends of about $35 million and 	
modest annual capital spending requirements of about $20 million. Belo 	
reinstated its shareholder dividend in early 2011, after a nearly two-year 	
suspension because of the recession. Even with the reinstatement of dividends, 	
we expect conversion of EBITDA into discretionary cash flow will be 	
satisfactory over the next 12 to 24 months, at around 25%-30%.	
	
Recovery analysis	
For the complete recovery analysis, please see Standard & Poor's recovery 	
report on Belo, to be published shortly, on RatingsDirect.	
	
Outlook	
The stable rating outlook reflects our view that Belo will continue to reduce 	
leverage on a trailing-eight-quarter EBITDA basis toward 4x over the next year 	
and maintain EBITDA margins above 30% and adequate liquidity over the 	
intermediate term. We expect the company will refinance its 6.75% notes due 	
2013 mainly with cash and some revolver borrowings. 	
	
We could raise the rating if the debt leverage improves to less than 4x on an 	
average trailing-eight-quarter basis. While this could happen through organic 	
EBITDA growth over the intermediate term, more likely, leverage improvement 	
would result from debt repayment. 	
	
Alternatively, although this is a less likely scenario, we could lower the 	
rating if the current trends in ad revenue reverse, causing EBITDA declines of 	
more than 20% and resulting in the cushion of covenant compliance to approach 	
10%. Additionally, we could lower the rating if the company adopts a more 	
aggressive financial policy that increases leverage through large 	
debt-financed acquisitions, or shareholder-favoring initiatives such as large 	
share repurchases and special dividends. 	
	
Research Contributor: Samantha Stone, New York	
	
Related Criteria And Research	
     -- Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011	
     -- Criteria Guidelines for Recovery Ratings, Aug. 10, 2009	
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009	
     -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade 	
Credits, May 13, 2008	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
	
Ratings List	
	
Ratings Affirmed; Outlook Action	
                                        To                 From	
Belo Corp.	
 Corporate Credit Rating                BB-/Stable/--      BB-/Positive/--	
	
Ratings Affirmed; Recovery Ratings Unchanged	
	
Belo Corp.	
 Senior Unsecured                       BB-                	
   Recovery Rating                      4                  	
 Subordinated                           BB-	
   Recovery Rating                      3	
	
Complete ratings information is available to subscribers of RatingsDirect on 	
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 	
by this rating action can be found on Standard & Poor's public Web site at 	
www.standardandpoors.com. Use the Ratings search box located in the left 	
column.

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