NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB' Issuer Default Rating (IDR) and all outstanding ratings for Belo Corporation (Belo). Fitch has revised the Rating Outlook to Positive from Stable. A full list of ratings appears at the end of this release.
Metrics are well within Fitch's previously stated leverage threshold of 4.0x, in a political year (5.0x in a non-political year), and place the company at the higher end of the 'BB' ratings category. The ratings and Outlook reflect the continued improvement in Belo's credit profile, driven by the company's debt reduction efforts (including the recent redemption of its $176 million 2013 maturity in November of 2012) as well as improvement in operating profits. Fitch estimates total leverage of 2.8 times (x) at Dec. 31, 2012, versus a peak of 6.0x in the downturn.
--Ratings may be upgraded over the next 12 to 24 months if the company continues to manage unadjusted gross leverage of less than 4.25x in a non-political year (recognizing that during political years, leverage would be closer to 3.25x). Continued demonstration of such a financial policy could warrant a one notch upgrade.
--Ratings would be stabilized if the company were to adopt a more aggressive financial policy and use debt to fund materially large share buy backs or acquisitions that drove leverage above 4.25x in a non-political year.
--Also Negative actions could occur if cyclical or secular pressure is expected to result in increased leverage outside of Fitch's parameters for current ratings.
In 2012, the company deployed its cash flows for the benefit of both equity- and bond-holders; increasing dividend and paying a special dividend for equity holders and redeeming early the 2013 $176 million senior unsecured note in November of 2012. The company has meaningfully reduced absolute levels of debt over the past five years. Fitch does not expect any more material reductions in absolute debt levels. However, given expected diversity of the ad revenue base and growth in retransmission revenues over the medium term, debt reduction is not necessary to consider a one notch upgrade of the ratings.
Belo maintains financial flexibility at current ratings for FCF funded share repurchases and M&A. Given metrics below Fitch's target, in a stable macroeconomic environment there is room for some debt-funded buybacks, though, depending on the amount of debt issued, this would likely remove any potential ratings upside.
Fitch expects a stable operating environment in 2013, with core advertising revenue growth in the low single digits, supported by auto advertising (the company's largest vertical). Political advertising revenue was robust and totaled approximately $60 million in 2012. Although the ratings do not give a material amount of credit to political revenue, given its temporary and volatile nature, it does provide a strong free cash flow (FCF) boost in even years. Fitch recognizes that the lack of material political advertising in 2013 will result in total revenue to decline in the low to mid-single digits.
Fitch expects Belo to continue to benefit from growth of high margin retransmission revenue, which provides incremental stability and visibility in the operating profile. The company noted that between July 2013 and February 2014, the company has 6 multichannel video programming distributor (MVPD) contracts up for renewal, covering 40% of Belo's subscribers. The company expects increases in retransmission fees, and Fitch believes this is achievable. Retransmission revenue reduces the overall risk in the operating profile as it moves the local affiliate model more towards the dual-revenue stream model of cable networks. However, given the leverage that Fitch expects the broadcast networks to retain over the local affiliates (particularly in an over the top [OTT] world), Fitch expects this revenue will be partially offset by increasing reverse compensation fees to the networks.
The ratings continue to be supported by Belo's strong local presence in the top-50 U.S. markets, with either the No.1 or No. 2 station in most of its markets, driven by a track record of making investments in its news infrastructure. Additionally, the company benefits from a diverse array of top network affiliations (excluding Arizona). These dynamics are expected to offer more protection from secular pressures than lower rated stations or weaker affiliations, and as such, Fitch would expect Belo to compete effectively with print products, radio and other broadcasters, for local ad dollars over the intermediate term.
Secular risks relate primarily to declining audiences amid increasing entertainment alternatives, with further pressures from the proliferation of OTT Internet-based television services. However, it is Fitch's expectation that local broadcasters, particularly the higher-rated stations, will continue to remain relevant and capture material audiences that local, regional and national spot advertisers will demand. Retransmission revenue reduces the overall risk to the operating profile.
Fitch views Belo's current liquidity as adequate, with $9 million of cash on hand and $179 million available under the $200 million revolving credit facility. Fitch expects Belo to generate nearly $20 to $30 million of FCF in 2013. Fitch expects a portion of this cash could be used for acquisitions or share repurchases.
As of Dec. 31, 2012, there was $736 million face value of debt outstanding, consisting of:
--$21 million in revolver borrowings due 2016;
--$275 million of guaranteed senior unsecured notes maturing November 2016;
--$440 million of senior unsecured notes maturing 2027.
Fitch affirms Belo's ratings as follows:
--Issuer Default Rating (IDR) at 'BB';
--Guaranteed RCF at 'BB+';
--Guaranteed senior unsecured notes at 'BB+';
--Non-guaranteed senior unsecured notes/bonds at 'BB'.
The Outlook is revised to Positive from Stable.
The 'BB+' rating on the RCF reflects the senior guarantee from substantially all of Belo's domestic subsidiaries, as well as the absence of secured debt in the capital structure. Although the guarantee on the senior unsecured 2016 notes is contractually subordinated to the guarantee on the bank debt, Fitch equalizes the ratings on the two obligations, given Belo's enterprise value and the portion of total debt and leverage comprised by both tranches of debt. The legacy notes are not guaranteed and are neither notched up or down from the IDR, reflecting the expectation for average recovery.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology