CHICAGO--(BUSINESS WIRE)--Fitch Ratings is maintaining the 'CCC/RR4' rating on iHeartCommunications, Inc.'s (formerly Clear Channel Communications, Inc.) (iHeart) latest offering of $250 million of 9.0% Priority Guarantee Notes (PGNs) due 2022. The notes are being issued as part of the same series as the $750 million of PGNs due 2022 that were issued on Sept. 10, 2014, and rated 'CCC/RR4'. Proceeds from the offering are expected to be used to prepay $245.9 million in Term Loan B due 2016 and $4.1 million in Term Loan C due 2016 and to pay fees and expenses related to the offering. iHeart's Issuer Default Rating (IDR) is 'CCC' and Clear Channel Worldwide Holdings, Inc. (CCWH) is 'B'. The Rating Outlook on iHeart is Negative and on CCWH is Stable. A full list of ratings follows at the end of this release.
The add-on PGNs are expected to share the same terms as the existing PGNs due 2022. Following the redemption, iHeart will have $916 million and $15 million in Term Loan B and Term Loan C remaining, respectively, and will have $1.2 billion in total maturities for 2016. The transaction is expected to incrementally increase total interest cost, but Fitch believes the company has adequate liquidity (including cash on hand, monetization of repurchased and outstanding notes, and asset sales) to meet its debt service obligations. Fitch expects free cash flow (FCF) to be negative over the next few years. The ratings and Negative Outlook reflect the limited room within the credit profile to endure any material deterioration in operations. Fitch calculates iHeart's interest coverage ratio (EBITDA/Gross Interest Expense) at 1x as of June 2014, and the company paid more than $1.5 billion in cash interest on an LTM basis.
Fitch does not expect a material amount of absolute debt reduction over the next several years, given the expected negative FCF. Instead, Fitch expects the company to continue to focus on extending or repaying its term loans via issuance at iHeart and Clear Channel Outdoor Holdings, Inc (CCOH).
Pro forma for the aforementioned transaction, iHeart has approximately $21.1 billion in consolidated debt (includes debt held at CC Finco LLC). Debt held at iHeart is $16.2 billion and consists of:
--$7.2 billion secured term loans ($931 million in 2016 and $6.3 billion in 2019);
--$5.3 billion secured PGNs, maturing 2019-2022;
--$2.1 billion in senior unsecured 12% cash pay / 2% PIK notes maturing in February 2021 (includes CC Finco LLC position of $423 million);
--$1.6 billion senior unsecured notes (including $725 million in legacy notes), with maturities of 2016-2027.
Debt held at Clear Channel Worldwide Holdings, Inc. (CCWH) is $4.9 billion and consists of:
--$2.7 billion in senior unsecured 6.5% notes due in 2022;
--$2.2 billion in subordinated 7.625% notes due 2020.
Liquidity
At June 30, 2014, iHeart had $572 million of cash, excluding $226 million of cash held at CCOH.
Backup liquidity consists of an undrawn $535 million asset-backed loan (ABL) facility (subject to an undisclosed borrowing base) that matures in December 2017 and is subject to springing maturities.
Security and Guarantees
The bank debt and PGNs are secured by the capital stock of iHeart, iHeart's non-broadcasting assets (non-principal property), and a second priority lien on the broadcasting receivables that securitize the ABL facility.
The bank debt and secured notes are guaranteed on a senior basis by iHeartMedia Capital I, LLC (holding company of iHeart), and by iHeart's wholly owned domestic subsidiaries. The exchange notes benefit from a guarantee from the same entities, although it is contractually subordinate to the secured debt guarantees. There is no guarantee from CCOH or its subsidiaries. The legacy notes and the new 10% notes receive no guarantees.
Recovery Ratings
iHeart's Recovery Ratings (RRs) reflect Fitch's expectation that the enterprise value of the company will be maximized in a restructuring scenario (going concern), rather than a liquidation. Fitch employs a 6x distressed enterprise value multiple reflecting the value of the company's radio broadcasting licenses in top U.S. markets. Fitch assumes going-concern EBITDA at $832 million and that iHeart has maximized the debt-funded dividends from CCOH and used the proceeds to repay bank debt. Additionally, Fitch assumes that iHeart would receive 88% of the value of a sale of CCOH after the CCOH creditors had been repaid. Fitch estimates the adjusted distressed enterprise valuation in restructuring to be approximately $6.6 billion.
The 'CCC/RR4' rating for the bank debt and secured notes reflect Fitch's estimate for a recovery range of 31%-50%. Fitch expects no recovery for the senior unsecured legacy notes, the 10% senior notes, and exchange notes due to their position below the secured debt in the capital structure, and they are assigned 'RR6'. However, Fitch rates the exchange notes 'CC' given the subordinated guarantee.
CCOH's RRs also reflect Fitch's expectation that enterprise value would be maximized as a going concern. Fitch stresses outdoor EBITDA by 15%, and applies a 7x valuation multiple. Fitch estimates the enterprise value would be $4 billion. This indicates 100% recovery for the unsecured notes. However, Fitch notches the debt up only two notches from the IDR given the unsecured nature of the debt. In Fitch's analysis, the subordinated notes recover in the 31% to 50% 'RR4' range, leading to no notching from the IDR.
Key Rating Drivers:
Fitch's ratings concerns center on the company's highly leveraged capital structure, with significant maturities in 2016; the considerable and growing interest burden that is expected to generate negative FCF in the near term; technological threats and secular pressures in radio broadcasting; and the company's exposure to cyclical advertising revenue.
The ratings are supported by the company's leading position in both the outdoor and radio industries, as well as the positive fundamentals and digital opportunities in the outdoor advertising space.
Rating Sensitivities:
Negative: An inability to extend maturities would result in a downgrade. This inability may derive from a prolonged consolidated cash burn, whether driven by cyclical or secular pressures, reducing iHeart's ability to fund debt service and near-term maturities. Additionally, cyclical or secular pressures on operating results that further weaken credit metrics could result in negative rating pressure. Lastly, indications that a distressed debt exchange (DDE) is probable in the near term would also drive a downgrade.
Positive: The current Rating Outlook is Negative. As a result, Fitch's sensitivities do not currently anticipate a rating upgrade.
Fitch's ratings are as follows:
iHeart
--Long-term IDR at 'CCC';
--Senior secured term loans at 'CCC/RR4';
--Senior secured priority guarantee notes at 'CCC/RR4';
--Senior unsecured exchange notes due 2021 at 'CC/RR6';
--Senior unsecured notes at 'C/RR6'.
The Rating Outlook for iHeart is Negative.
Clear Channel Worldwide Holdings, Inc.
--Long-term IDR at 'B';
--Senior unsecured notes at 'BB-/RR2';
--Senior subordinated notes at 'B/RR4'.
The Rating Outlook for Clear Channel Worldwide Holdings, Inc. is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=879014
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