LodgeNet Interactive Corp.(fka LNETQ)

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21:01:18
29-11-2012 22:22 TEXT-S&P cuts LodgeNet Interactive corp credit to 'CC'
(The following statement was released by the rating agency) Overview

-- U.S.-based in-room entertainment and data services provider LodgeNet is in negotiations with its lenders regarding restructuring options.

-- We are lowering our corporate credit rating on LodgeNet two notches to 'CC' from 'CCC'.

-- The negative rating outlook reflects our view that the company will likely default over the very near term.

Rating Action On Nov. 29, 2012, Standard & Poor's Ratings Services lowered its corporate credit rating on LodgeNet Interactive Corp. to 'CC' from 'CCC'. The rating outlook is negative.

The downgrade follows the company's disclosure that it is negotiating with its lenders and third parties regarding restructuring options, which may include a filing under Chapter 11. As of Sept. 30, 2012, the company was in violation of the 4.0x net leverage covenant in its credit facility. The company entered a forbearance agreement in October 2012 in which lenders agreed not to exercise their default-related rights and remedies through Dec. 17, 2012. The company has classified its debt due April 2014 as current on its balance sheet, as lenders could require payment of amounts outstanding on Dec. 17, 2012. These liquidity constraints and the covenant breach have resulted in substantial doubt about the company's ability to continue as a going concern.

Rationale We view LodgeNet's business risk profile as 'vulnerable,' because of negative secular trends at its guest entertainment business. We view LodgeNet's financial risk profile as 'highly leveraged' (based on our criteria) because of our expectation that the company could default over the very near term.

LodgeNet is a provider of in-room entertainment and data services to hotels. Its operating results are subject to trends in consumer and corporate travel; the discretionary nature of traveler purchases; the unpredictable success of movies, which generate the majority of room revenue; and consumers' changing habits in accessing entertainment. We believe that increases in broadband access (complimentary or fee-based) in hotel rooms, along with growing usage of portable devices, will continue to reduce demand for LodgeNet's core on-demand movie services. Higher-margin guest entertainment revenue (about half of revenue) remains under secular pressure as a result of the increased penetration of broadband and high-speed cellular networks, combined with a shift by consumers to viewing more content online.

In July 2012, the company withdrew its financial guidance for 2012, reflecting limited visibility for the remainder of the year. Under our base-case scenario, we expect operating performance to remain under pressure for the remainder of 2012 and 2013 because of continued pressure on guest entertainment revenue and a decline in the number of rooms served. We expect revenue to decline at a low-double-digit percent rate and EBITDA to decrease by slightly more than 25% in 2012 and 2013. We believe that guest entertainment revenue per room will continue to decline at a mid-double-digit percentage rate with consumers continuing to shift to various entertainment alternatives. We expect the decline in rooms served to continue at a low-double-digit percent rate.

In the third quarter of 2012, revenue and EBITDA declined 15% and 29%, respectively, largely due to a decline in higher-margin guest entertainment revenue, which fell because of a 12% decline in the average number of guest entertainment rooms served and a 14% decline in guest entertainment revenue per room. Guest entertainment revenues are declining at an accelerating rate, with a drop of 24% in the third quarter of 2012. The EBITDA margin declined to 21% for the 12 months ended Sept. 30, 2012 versus 24% for the prior 12 months due to a high proportion of fixed costs. We expect the company's EBITDA margin will contract to roughly 21% in 2012 and 19% in 2013, with cost cuts being more than offset by revenue declines.

Lease-adjusted debt leverage (including preferred stock) increased to 5.0x for the 12 months ended Sept. 30, 2012 from 4.0x over the prior 12 months as debt reduction was offset by weaker operating performance. EBITDA coverage of interest (including the preferred dividend) decreased slightly to 2.5x from 2.7x over the same period. We associate leverage above 5x with a highly leveraged financial profile, based on our criteria.

LodgeNet's conversion of EBITDA into discretionary cash flow fell to 32% in the 12 months ended Sept. 30, 2012, from 40% a year earlier, despite an increase in accounts payable resulting from delaying certain payments to major programming suppliers DirecTV and HBO, because of weaker profitability and higher capital spending. Capital spending as a percentage of EBITDA increased to 46% from 23% over the same period. We believe the conversion rate of EBITDA to discretionary cash flow could decline to roughly 20% for the full year 2012.

Liquidity

LodgeNet has 'weak' sources of liquidity to cover its needs over the next 12 months because the company is subject to a forbearance agreement, as it was not in compliance with its net leverage covenant as of Sept. 30. 2012, and it does not have access to additional borrowings under its revolving credit facility. Our view of the company's liquidity profile incorporates the following expectations and assumptions:

-- We expect that the company's sources of liquidity over the next 12-18 months will exceed its uses by 1.2x or more.

-- We believe that the company will not be able to absorb low-probability shocks.

-- We do not believe that the company has a good standing in the credit markets.

Liquidity sources are limited to $18.7 million in cash balances as of Sept. 30. At Sept. 30, 2012, $21 million was outstanding under the revolving credit facility due April 2013, and no additional borrowings are permitted.

The leverage ratio, as defined in the company's credit agreement, increased from 3.76x as of June 30, 2012 to 4.52x as of Sept. 30, 2012, which was above the maximum allowable ratio of 4.0x. Effective Sept. 30, 2012, under the forbearance agreement that expires Dec. 17, 2012, the pricing of the term loan and revolver increased an additional 200 basis points, resulting in roughly $7 million in additional annual interest. Outlook

The negative outlook reflects our view that the company will likely default over the near term due to strained liquidity and an unfavorable operating outlook. We regard a near-term revision of the outlook to stable or upgrade as remote scenarios that would require improvement in operating performance and restoration of a healthy margin of compliance with financial covenants, none of which appears probable.

Related Criteria And Research

-- Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012

-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

-- 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 Downgraded

To From LodgeNet Interactive Corp.

Corporate Credit Rating CC/Negative/-- CCC/Negative/--

Downgraded; Recovery Remains Unchanged

LodgeNet Interactive Corp.

Senior Secured CC CCC

Recovery Rating 3 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.

(New York Ratings Team)

(e-mail: [e-mail]; Reuters Messaging: [e-mail]; Tel:[phone];)

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