MOODY' S CONFIRMS RATINGS OF WESTINGHOUSE ELECTRIC CORPORATION (SENIOR UNSECURED AT Ba1); ASSIGNS FIRST-TIME Baa3 AND Ba1 RATINGS TO TRANCHES OF WESTINGHOUSE'S SENIOR SECURED BANK FACILITIES; AND LOWERS RATINGS OF CBS INC. (SENIOR TO Ba1, SHORT TERM RATI
New York, 11-20-95 -- Moody's Investors Service confirmed the Ba1 senior unsecured debt and the "ba3" Series C preferred stock rating of Westinghouse Electric Corporation ("WEC"), assigned a Baa3 rating to the $2.5 billion Term Loan I and a Ba1 rating to both of the $2.5 billion Term Loan II and Revolving Credit tranches of the company's new $7.5 billion seven year senior secured bank credit agreement ("credit facility"), which is guaranteed by certain subsidiaries and secured by a pledge of CBS Inc. ("CBS") common stock. This is the first time Moody's has rated WEC's credit facility. Moody's withdrew its "ba3" rating for Series B preferred stock due to its conversion to equity. The WEC ratings confirmation reflects Moody's expectation that, while significant operational and financial challenges lie ahead for both the acquired and existing businesses, WEC should be able to reduce the first tranche of its bank debt quickly through asset sales and overall debt longer term through excess operating cash flow. The challenges to longer term debt reduction will be the successful integration of CBS into WEC's existing broadcasting operations, which should be achievable and should result in a better cost structure and profitability of the segment, and the smooth execution of moving WEC from a diversified industrial company into an increasingly broadcasting driven enterprise.
Moody's stated that while CBS will remain the sole legal obligor of its existing senior unsecured debt, the downgrade of CBS's senior rating to Ba1 from Baa3 and of its short term rating to Not Prime from Prime-3 reflects CBS's status as a legal guarantor of the Westinghouse credit facility and the effective pledge of its cash flows and any potential asset sales to service and repay Westinghouse indebtedness.
The Term Loan I credit facility rating (one notch higher than WEC's senior unsecured debt, Term Loan II, and the Revolving Credit) reflects its priority of claim versus the other credit facility tranches because initial asset sales proceeds must first be applied to fully repay the loan and the fact that Term Loan I creditors always will be in a secured position until they are repaid. While all credit facility tranches benefit from the incremental value inherent in the CBS stock pledge in addition to the upstream subsidiary guarantees, such security and guarantees may be released under certain circumstances, one of which includes the full repayment of Term Loan I.
Moody's went on to say that the ratings incorporate the increased strength and cash generating capability of the combined radio and television stations, the expectation that FCC waivers and ultimately the final telecommunications legislation will allow WEC to broadly benefit from its increased scale, and the improved financial flexibility expected to be derived from the near term application of asset sales proceeds to pay down bank debt.
The ratings also recognize the significant challenges of managing the integration and growth of the acquired CBS businesses, whose relative performances have deteriorated over the past couple years. These challenges include the heightening competition in regard to capturing an increasingly fragmented universe of radio and television viewers and thus advertising revenues, the cyclical nature of advertising spending, the need to improve the CBS network and its programming content, and WEC's relative lack of experience at operating a television network. Additional risks seen by Moody's include the cultural and managerial challenges of executing a substantial transformation of a diversified industrial company into an increasingly media driven enterprise, the possibility of customer uncertainty, reduced employee productivity and the potential diversion of needed management attention from existing industrial businesses during this integration and transformation period, the company's limited financial flexibility (debt to book capitalization and debt to EBITDA of nearly 80% and 5.5 times, respectively, at closing), and the overhang of contingent liabilities, including unfunded pension obligations and important unresolved litigation issues, the funding and expected settlements of which may negatively affect future cash flow. Moreover, Moody's remains concerned about the difficult operating environment of the company's Power Generation and Energy Systems businesses and the potential for further restructuring charges to improve their cost structures and profitability.
The credit facility, which will finance the acquisition and refinance existing WEC bank debt and certain CBS debt, consists of three tranches which are equally secured by a pledge of 100% of CBS common stock and unconditionally guaranteed by certain WEC subsidiaries, including CBS. The first $2.5 billion term loan has a 2.5 year maturity with a $2.0 billion scheduled repayment after two years and a $500 million balloon at maturity. While the ability of WEC to repay the first term loan relies substantially on cash proceeds from asset sales, Moody's expects this to be achieved in a timely manner. The second $2.5 billion term loan has a seven year maturity with fairly even quarterly repayments beginning nearly four years after the closing date. Both term loans are subject to mandatory prepayments and optional prepayments related to certain debt or equity issuance, asset sales, and excess cash flow recapture, with the first term loan taking priority. The $2.5 billion revolving credit facility has a seven year maturity.
Moody's noted that the credit facility covenant package provides for a variety of restrictions regarding the limitation of additional liens, indebtedness, and dividend payments, although several carve outs to these limitations, including potential CBS and other business spin-offs, do provide WEC additional operating and financial flexibility. Three financial covenants, consisting of a maximum Debt to EBITDA, minimum EBITDA Interest Coverage, and a minimum Net Worth, are reasonably limiting in the early stages of the credit facility with increasing financial covenant compliance room going further out to the extent management executes its plan.
Over the intermediate term, there could be upwards rating pressure to the extent that management achieves its planned debt reduction while also successfully integrating the CBS acquisition and improving overall profitability and cash flows.
Westinghouse Electric Corporation, headquartered in Pittsburgh Pennsylvania, is a global diversified broadcasting, technology and industrial equipment company.
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