Moody's Investors Service has assigned a B2 rating to Cumulus Media regarding its proposed $525 million debt refinance due in 2026. Such a rating means the secured term loan is considered speculative and is subject to high credit risk.
Meanwhile, a B2 Corporate Family Rating (CFR)—referring to the company’s ability to honor its financial obligations – and a B2 rating on Cumulus’ $500 million senior secured notes also due in 2026 are unchanged. The outlook remains “stable.”
The new outlook from Moody’s follows its previous ratings outlook in June, as Inside Radio reported.
Net proceeds from the company’s proposed offering and cash of $34 million are expected to be used to repay the remaining portion of its existing first lien term loan. The transaction provides a maturity extension for the term loan to 2026, while the transaction is also expected to lead to lower interest expenses, due to a $29 million reduction in outstanding debt. This is in addition to a $50 million debt repayment that occurred earlier in Q3 2019. The rating on the existing term loan will be withdrawn after repayment, Moody’s explains.
Explaining the ratings rationale, Moody adds that the B2 CFR reflects Cumulus’ improved pro forma debt-to-EBITDA leverage of 4.8-times as of second quarter 2019—which is down from 5.4-times at the end of 2018.
“The terrestrial radio industry faces challenging market conditions and is being negatively affected by the shift of advertising dollars to digital mobile and social media as well as heightened competition for listeners from several digital music providers,” Moody’s states in the report. “Secular pressures and the cyclical nature of radio advertising demand have the potential to exert substantial pressure on EBITDA performance over time.”
Working to Cumulus’ benefit is its large portfolio of stations, a “small but growing” local digital marketing services platform, and the Westwood One network’s roster of syndicated programming. Improved operations following 2015’s change in management also support the ratings. Organic EBITDA (a measure of cash flow) improved in 2018 because of lower costs, high margin political ad dollars, and continued improvement at Westwood One following several years of decline.
“Cumulus has also aggressively paid down debt with free cash flow and asset sales and reduced debt by $275 million since exiting from bankruptcy in June 2018,” Moody’s writes. The investor firm expects Cumulus will “consider additional deleveraging transactions going forward and will maintain a conservative financial policy.”
The stable outlook also reflects Moody's belief that revenue will be relatively flat, but organic EBITDA will decline in the mid to high single digits by the end of the year, with Cumulus’ reduction in political ad revenue in a non-election year. Performance is also expected to be relatively flat in 2020, even with higher political ad revenue in an election year. Further, “Cumulus is expected to face challenging industry conditions going forward, but Moody's anticipates that the company will consider additional asset sales and direct free cash flow towards debt repayment.”
An upgrade could occur if Cumulus generated positive organic revenue growth overall as well as in its radio station division with expanding margins. Free cash flow and a percentage of debt greater than 10% and “a good liquidity position” would also be required with a financial policy consistent with a higher rating. On the other hand, ratings could be downgraded if performance were to deteriorate due to “secular pressures,” competition or economic weakness.