Moody's assigns a Ba3 rating to CBS Radio's new revolver; term loan B-1 rating unchanged following upsize
Global Credit Research - 06 Nov 2017
New York, November 06, 2017 -- Moody's Investors Service (Moody's) assigned CBS Radio Inc.'s (CBS Radio) proposed $250 million revolving credit facility a Ba3 rating. The Ba3 rating of the upsized term loan B-1 and B1 Corporate Family Rating (CFR) are unchanged. The outlook remains stable.
The term loan B-1 due 2024 is expected to be upsized by $830 million to $1,330 million from $500 million. The proceeds of the upsized term loan B-1 and a draw of $100 million from the new revolver are expected to fund the repayment of the existing term loan B due 2023 and repay the outstanding balance on the prior revolving credit facility. The transaction extends the maturity date of the credit facility and leads to additional interest expense savings.
The transaction is expected to close following the merger between CBS Radio and Entercom Communications Corp. that was announced on February 2, 2017 with Entercom being the surviving entity. CBS shareholders are expected to own 72% of the combined entity with Entercom shareholders owning a 28% position. The debt issued at CBS Radio, including the new revolver, term loan B-1 and $400 million of senior notes will remain outstanding as the change of control provision will not be triggered by the transaction. The debt will be issued by CBS Radio and be secured by the assets of both companies. Shortly after the closing of the transaction, we will withdraw all the ratings at CBS Radio and assign the debt ratings under the surviving entity, Entercom (B1 CFR; stable).
The merger will create a substantially larger company with pro-forma LTM revenue of $1.6 billion as of Q3 2017 with 235 stations. The greater scale of the combined company is expected to increase its competitive position and heighten demand from local and national advertisers. While Entercom's management team has a good track record of performance and integrating acquisitions, the merger with a much larger company elevates integration risk which may delay the cost and revenue benefits of the transaction.
A summary of Moody's actions are as follows:
..CBS Radio Inc.
New $250 million revolving credit facility due 2022, assigned Ba3 (LGD3)
Corporate Family Rating unchanged at B1
Upsized term loan B-1 due 2024 unchanged at Ba3 (LGD3)
The assigned ratings are subject to review of final documentation and no material change in the terms and conditions of the transaction as provided to Moody's.
RATINGS RATIONALE
CBS Radio's B1 CFR reflects the company's position as the second largest radio broadcaster in the US and its announced acquisition with Entercom. The combined company will have leading market positions in 22 of the top 25 markets. The company benefits from a geographically diversified footprint with strong market clusters in most of the areas it operates which enhances its competitive position. A diversified format offering of music, news, and sports are also positives to the rating. Leverage pro-forma for the transaction is approximately 4.5x as of Q3 2017 (including Moody's standard lease adjustments) and is expected to decline to 4.4x pro-forma for announced asset sales and approximately $100 million of projected debt repayment in the near term. Modest amounts of capital expenditures are expected to lead to good free cash flow that will be used for dividends, stock buybacks, additional acquisitions or debt repayment. The rating also reflects the secular pressure in the radio industry with an increasing number of digital music offerings and advertising alternatives as well as the cyclicality of the industry. Revenue and EBITDA performance at CBS Radio have been weak YTD in 2017, although a part of the increase in expenses is due to its prior plan to operate on a standalone basis which will not be recurring post the closing of the merger. CBS Radio's performance was also impacted by the uncertainty during the time between when the acquisition was announced and the expected closing in November in our opinion.
Liquidity is expected to be good as reflected in our speculative grade liquidity rating of SGL-2. The company will benefit from a $250 million revolver due in 2022 that is expected to have $100 million drawn at closing of the merger. The revolver is subject to a net secured leverage ratio of 4x (up to 4.5x one year after permitted acquisitions) as calculated by the credit agreement. The term loan is covenant lite. The cash balance at closing is expected to be approximately $10 million and we project the cash balance to increase as announced asset sales are completed.
The outlook is stable and reflects our expectation for modestly negative pro-forma revenue growth through 2018 due to secular challenges in the radio industry, the need to integrate assets following the merger and turn around performance at underperforming stations. However, debt repayment or cash funded acquisitions are expected to be a source of deleveraging over the next year and we project leverage levels will be relatively unchanged during the time period.
The rating could be upgraded if leverage declined below 3.75x (including Moody's standard adjustments) following a successful integration with a good liquidity profile and a high single digit percentage of free cash flow to debt ratio. Positive organic revenue growth and stable EBITDA margins would also be required in addition to confidence that management would maintain financial policies (including dividends, share repurchases, and acquisitions) that were consistent with a higher rating level.
The rating could be downgraded if leverage increased above 5.25x due to underperformance, audience and advertising revenue migration to competing media platforms, or other leveraging events. A reduction in free cash flow to debt ratio (after dividends) well below 5% or a weakened liquidity profile could also lead to negative rating pressure.
CBS Radio Inc. is currently an operating subsidiary of CBS Corporation. In February, 2017 CBS Radio entered into a merger agreement with Entercom Communications Corp. The company is the second largest radio operator in the US based on revenue. Standalone LTM revenue as of Q3 2017 is approximately $1.2 billion.
The principal methodology used in this rating was Media Industry published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology
