NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded iHeartCommunications, Inc.'s (iHeart) Long-Term Issuer Default Rating (IDR) to 'CC' from 'CCC'. Fitch has also affirmed the IDRs for Clear Channel Worldwide Holdings, Inc. (CCWW) and Clear Channel International B.V. (CCIBV) at 'B'. CCWW and CCIBV are indirect, wholly-owned subsidiaries of Clear Channel Outdoor Holdings, Inc. (CCOH), iHeart's 89.9% owned outdoor advertising subsidiary. The Rating Outlook on the outdoor subsidiaries is Stable. A full list of rating actions follows at the end of this release.
The downgrade reflects the increasing likelihood that iHeart will look to restructure its debt within a year or two. The restructuring could take the form of either a bankruptcy filing or an out-of-court restructuring, such as a debt-for-equity exchange, which Fitch would likely consider a default.
Fitch's view is supported by iHeart's sizeable FCF burn and upcoming debt maturities, including the ABL facility that matures in 2017 and the $564 million in debt maturing in 2018. Fitch expects that the company has adequate liquidity to get past 2016 but it will likely need to execute on additional liquidity levers to get through 2018, which could include incremental asset sales or debt issuance at the parent or subsidiary level. Fitch believes that given the unsustainability of the company's capital structure and weak free cash flow profile, these liquidity measures would not materially lessen the likelihood of an eventual default.
iHeart's negotiations with its senior lenders have become increasingly challenged since March 2016, when certain holders of the PGNs disputed the transfer of 100 million of class B shares of CCOH to iHeart's wholly owned and unrestricted subsidiary Broader Media, LLC with an issuance of a Notice of Default (NOD). Although the court's final judgement ruled in iHeart's favor and overruled the NOD, the PGN noteholders filed an appeal in August 2016 that remains outstanding.
On Nov. 28th, 2016, iHeartCommunications announced six separate consent solicitations to amend the terms of the five issues of priority guarantee notes (PGNs) which mature from 2019 to 2023 and the senior notes due 2021 to carve out 'non-accredited' institutional investors in the U.S. Fitch believes that if the consent solicitation is successful it will make future changes to the company's capital structure, including a potential distressed debt exchange, easier to implement as it would reduce registration requirements. The consent solicitations will expire on Dec. 9th, 2016.
Notably, if iHeart were to miss more than $100 million of the 193 million in principal payments coming due on Dec. 15th (net of the $57 million held by the company), it would trigger cross-default provisions in iHeart's senior secured credit facilities, which would accelerate required debt repayment at iHeart.
Fitch has affirmed the ratings of subsidiaries CCWW and CCIBV based on the outdoor segment's stand-alone operating and credit profile. CCWW and CCIBV debtholders are protected in the event iHeart defaults as no guarantees or cross-default provisions exist between the subsidiaries and iHeart. However, in the event of a restructuring at iHeart, CCCOH becomes an unsecured creditor with the $769.5 million it was due as of Sept. 30, 2016 due to CCOH under the intercompany revolving promissory note between iHeart and CCOH.
KEY RATING DRIVERS
Leveraged Capital Structure: The ratings reflect iHeart's highly levered capital structure. Fitch estimated total and secured leverage of 12.2x and 7.5x, respectively, as of Sep. 30, 2016. Total leverage exceeds levels at the leveraged buyout, as minimal FCF has prevented debt reduction and EBITDA has not returned to pre-downturn levels.
Resolution of Legal Issues: In May 2016, iHeart prevailed in a lawsuit with noteholders related to its transfer of 100 million shares of Clear Channel Outdoor Holdings, Inc. to Broader Media, LLC, a wholly owned subsidiary of iHeart that now owns 27.6% of CCOH. Fitch believes iHeart may be considering issuing debt at Broader Media secured by the shares, with potential uses to include offering existing iHeart bondholders the option to exchange their holdings into new Broader Media debt.
Near-Term Maturities Reduced: iHeart completed several transactions over the past 18 months that reduced near-term maturities and improved liquidity. Most recently, in July 2016 the Broader Media LLC subsidiary repurchased roughly $383 million of aggregate principal of the 10% senior unsecured notes due 2018 at a discount for $222 million in cash. The repurchase will reduce annual interest expense by $38 million. The company now has $197 million in debt maturing in 2016 (Dec. 15th), $245 million in 2017 (including the $230 million outstanding under the ABL facility), and $564 million maturing in 2018 (down from $930 million due to recent open market repurchases). The next maturity wall is in 2019, when $8.3 billion matures.
Levers to Address Maturities: iHeart has several levers to address near-term maturities. Primary sources of liquidity include iHeart's cash on hand of $149 million as of Sept. 2016, excluding $394 million in cash held at CCOH, and $149 million available under the asset-based lending (ABL) facility. Additional sources of liquidity include a possible dividend distribution from CCOH non-core asset sales (CCOH closed on the sale of the Australian outdoor properties for $204 million in October) or the possibility of incremental secured debt issuance through new notes at a parent or the subsidiary level. Fitch expects iHeart will continue to execute on these liquidity levers to meet near-term maturities and fund FCF burn.
Incremental Senior Borrowing Capacity: On Oct. 4, 2016, iHeart announced the success of the consent solicitation to the holders of the senior notes due 2021 to amend the borrowing capacity under the Credit Facility - increasing the principal amount $500 million to $17.271 billion. Fitch views this amendment positively as it improves short-term liquidity by increasing the senior borrowing capacity.
Capital Market Flexibility: Recent credit markets have been accommodating to iHeart and other highly leveraged issuers until experiencing significant duress last year. Although capital markets regained their footing, their willingness to accommodate highly levered credits is suspect and their flexibility would ultimately depend on iHeart's ability to reduce secured leverage to a level where lenders would be willing to recommit capital, which is likely below the 6x level at which the banks originally lent.
Outdoor Subsidiary Ratings: Clear Channel Worldwide Holdings, Inc.'s (CCWW) IDR considers its stand-alone credit and operating profile, as well as its legal and operational relationship with iHeart. CCWW is an indirect wholly-owned subsidiary of Clear Channel Outdoor Holdings, Inc. (CCOH), a 89.9%-owned subsidiary of iHeart, which holds all of iHeart's outdoor assets. Although there is material protection for CCWW, iHeart is expected to continue to extract cash from the entity.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case include:
--Fitch assumes that radio revenues grow at 1% over the forecast period.
--Fitch estimates declines in Outdoor revenue in 2017 reflect impact of non-core asset divestitures and that consolidated Outdoor revenues return to low single-digit growth in 2018.
--Fitch estimates EBITDA margins remain roughly flat in the 29% range on a consolidated basis.
--Fitch estimates capex of $325 million in 2016 at the mid-point of management's 2016 guidance and capex approximating 5% of revenues thereafter. Capex continues to be weighted towards the Outdoor segment and in particular the build of digital displays.
--Fitch does not expect a material amount of improvement of iHeart's credit profile or absolute debt reduction over the next several years, given the expected negative FCF.
--Fitch does not include any material asset sales other than the ones already announced and closed.
--iHeart will need to conduct further liquidity enhancing transactions to meet 2018 maturities.
RATING SENSITIVITIES
Positive: Fitch does not currently anticipate a rating upgrade given iHeart's unsustainable capital structure, its resulting high cash interest burden and FCF burn, as well as the cyclical and secular pressures inherent in the radio industry.
Negative: Given the company's unsustainable capital structure, Fitch believes there is limited room at the current rating level for deterioration in the company's operating performance or liquidity profile. An inability to repay or extend maturities would result in a downgrade. Lastly, indications that a DDE is probable in the near term would also drive a downgrade.
LIQUIDITY
Liquidity remains limited, although Fitch believes iHeart could use available liquidity levers to meet Dec. 15th interest and principal repayments. iHeart had $149 million in balance sheet cash as of Sept. 30, 2016, excluding the $394 million in cash held at CCOH. Backup liquidity consists of the ABL facility that matures in December 2017. Availability under the ABL facility was approximately $148.5 million as of Sept. 30, 2016. Clear Channel Outdoor International also closed on the sale of its Australian Outdoor operations in October 2016 for aggregate proceeds of $204 million. Notably, the proceeds of this asset sale sit at subsidiary CCOH and parent iHeartCommunications' access to the proceeds would require a dividend distribution and approval from Clear Channel Outdoor's Board of Directors. However, Fitch believes there is adequate capacity under the company's restricted payments basket to make a distribution.
iHeart has completed several transactions over the past 18 months that reduced near-term maturities and improved liquidity. In July 2016, Broader Media LLC, a wholly owned subsidiary of iHeartCommunidations, repurchased in the open market $383 million of aggregate principal of iHeartCommunications' 10% senior notes due 2018 for $222 million in cash. The company now has $197 million in debt maturing in 2016, $245 million in 2017 (including the $230 million outstanding under the ABL facility), and $564 million maturing in 2018 (down from $930 million due to recent open market repurchases). The next maturity wall is in 2019, when $8.3 billion matures.
Fitch believes that iHeart has adequate liquidity options to meet funding requirements in 2016. However, Fitch remains concerned about the continued FCF burn and the sizeable, albeit reduced, amount of debt maturing in 2018 which Fitch believes will require incremental liquidity generating transactions.
As of Sept. 30, 2016, iHeart had approximately $20.7 billion of debt outstanding, including $15.5 billion in debt held at iHeartCommunications and $4.95 billion in debt held at Clear Channel Worldwide Holdings, Inc.
Fitch has downgraded the following:
iHeartCommunications, Inc.
--Long-term IDR to 'CC' from 'CCC';
--Senior secured term loans to 'CC/RR4' from 'CCC/RR4';
--Senior secured priority guarantee notes to 'CC/RR4' from 'CCC/RR4';
--Senior unsecured guarantee notes due 2021 to 'C/RR6' from 'CC/RR6'.
Fitch has affirmed the following ratings:
iHeartCommunications, Inc.
--Senior unsecured legacy notes at 'C/RR6'.
Clear Channel Worldwide Holdings, Inc.
--Long-term IDR at 'B';
--Senior unsecured notes at 'BB-/RR2';
--Senior subordinated notes at 'B-/RR5'.
Clear Channel International B.V.
--Long-term IDR at 'B';
--Senior unsecured notes at 'BB-/RR2'.
Date of Relevant Rating Committee: 08, December, 2016.
Additional information is available on www.fitchratings.com.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Historical and projected EBITDA(R) is adjusted to add back non-cash stock-based compensation;
--EBITDA(R) metrics are unadjusted for dividends received from Associates/paid to Minorities.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016)
https://www.fitchratings.com/site/re/890199
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016222
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https://www.fitchratings.com/regulatory
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