NEW YORK – Moody’s Investors Service said that additional rating downgrades are "likely", as the contracting US economy’s adverse impact on broadcast revenues is already at the high end of its forecasted range in 2009.
Last October, Moody’s predicted that broadcasters would experience a 15-20% average year over year decline in 2009 verses 2008. The rating agency used the lower end of that range spread evenly through the year as its initial assumptions in forecasting each company’s revenue, which has led to downgrades and negative rating outlooks for about 28 companies so far.
Noting “a high likelihood of ratings volatility for broadcasters”, Moody’s released a statement Wednesday saying that as declines in excess of 20% are already occurring in the first half of the year, ratings will most likely be adjusted down further as the year goes on. Some broadcasters have paced above 25% revenue declines in January, particularly those with stations located in the weakest economic metro areas where unemployment and home foreclosures are highest.
The statement said that this pattern “heightens the risk” that broadcasters will breach bank credit agreement financial covenants as early as Q1 and Q2 of 2009, and some may run out of liquidity earlier than expected.
Unless advertising revenues rebound in coming fiscal quarters, which Moody’s says appears less likely, more serious revenue declines could result in EBITDA contraction of as much as 35-40%, increasing leverage "well into double digit levels". This would make it increasingly difficult for companies to offset the weakness later in the year, potentially resulting in covenant defaults.
While some companies with high debt leverage could receive amendments and waivers of covenant breaches to temporarily forestall a default, the cost to the broadcaster may be a hike in interest rates which in turn, will reduce what little cash flow remains. Others with little or no free cash flow and liquidity may opt or be forced to restructure their debt under bankruptcy protection.
