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Rating Action:

MOODY'S ASSIGNS Ba2 RATINGS TO BLOCK COMM'S NEW SR. SECURED BANK FACILITIES; B1 RATING TO NEW SR. UNSECURED NOTES; AFFIRMS Ba3 CORPORATE FAMILY RATING; OUTLOOK STABLE

06 Dec 2005
MOODY'S ASSIGNS Ba2 RATINGS TO BLOCK COMM'S NEW SR. SECURED BANK FACILITIES; B1 RATING TO NEW SR. UNSECURED NOTES; AFFIRMS Ba3 CORPORATE FAMILY RATING; OUTLOOK STABLE

Approximately $340 million in rated debt affected.

New York, December 06, 2005 -- Moody's Investors Service today assigned Ba2 ratings to Block Communications, Inc.'s ("Block") new $190 million senior secured credit facilities ($75 million revolving credit facility due 2012, $115 million term loan B facility due 2013) and a B1 rating to the company's proposed issuance of $150 million in senior unsecured guaranteed notes due 2015. Additionally, Moody's affirmed the company's Ba3 corporate family rating and stable outlook. The proceeds of the transaction will be used to refinance the company's capital structure including the $73.5 million outstanding under the existing senior secured credit facilities and $175 million in 9.25% senior subordinated notes due 2009. As such, the refinancing is neutral to leverage.

The ratings and outlook reflect Block's relatively strong positions within its broadcast markets, the strength and stability of its cable operations (accounting for 29% of the revenues and 73% of EBITDA for the TTM ended September 30, 2005), balanced by our expectation that the company's publishing segment will continue to face operating challenges into 2006.

Moody's assigned the following ratings:

i) Ba2 rating to the $75 million senior secured revolving credit facility due 2012,

ii) Ba2 rating to the $115 million senior secured term loan B due 2013, and

iii) B1 rating to the $150 million of proposed senior notes due 2015.

Moody's affirmed the following rating:

i) Ba3 corporate family rating, and

ii) B2 rating on the $175 million of 9.25% senior subordinated notes due 2009.

The outlook is stable.

Additionally, Moody's has withdrawn the Ba2 ratings on the company's existing senior secured credit facilities and intends to withdraw the B2 rating on the $175 million of 9.25% senior subordinated notes upon completion of the company's proposed tender offer.

The ratings reflect the risks posed by Block's still high financial leverage, the lackluster performance in its television and publishing segments that has been below that of the company's comparative peer groups. The ratings remain constrained by the continued deterioration in operating performance of its publishing segment. We note that while the publishing business generated $254.3 million in revenues, representing 57% of total revenues, it contributed only $6.1 million in EBITDA, implying only a 2.4% margin, for the trailing twelve months ended September 30, 2005 (a decline from the $10 million in EBITDA generated from this segment for FY 2004). While we believe the company will conduct union negotiations to seek more favorable contract terms, we expect that for the near-to intermediate term the company's publishing operations will remain pressured by the high cost structure and growing health care and post retirement expenses associated with its predominantly unionized workforce. The ratings also incorporate other risks associated with Block's operating segments which include negative circulation trends, and paper price volatility relevant to the newspaper publishing sector; the high and rising costs of cable programming, particularly as it relates to smaller system operators; and the company's overall exposure to today's more fluid advertising environment.

However, the ratings are supported by the high underlying asset value attributed to the company's media assets including its advanced cable system, the inherent "stick value" associated with its five broadcast television stations (including a duopoly in the Louisville, KY market, the 50th DMA), and the two broadsheet newspapers that are dominant in their markets (Pittsburgh Post-Gazette and Toledo Blade). Moreover, the ratings benefit not only from the stability of the cable operations, but also the strong prospects for cable revenue and cash flow growth due to an expected increase in the penetration rate of enhanced services to its existing residential subscriber base (telephony, cable modem, digital cable, tiered service offerings). Further, the company has expressed willingness to consider strategic alternatives for its under-performing television and publishing assets which could potentially de-lever its balance sheet.

The stable outlook reflects Moody's expectation that the improvement in broadcasting cash flow with the return of political revenues in 2006, coupled with expected cash flow growth associated with enhanced service offerings of the cable operations should be able to substantially offset the expected continued weakness of the company's publishing business. Moody's estimates that the publishing segment will burn cash in 2006 after capital expenditures without significant revisions to current union labor contracts. As such, Moody's anticipates that leverage (as measured as total debt to EBITDA using Moody's standard analytic adjustments) may increase to above 5.0 times by FYE 2006, reducing the cushion within the current Ba3 corporate family rating category. Moody's expects that Block will attempt to implement cost savings in the publishing segment to improve profitability and return to a positive free cash flow position; however, to the extent that Block is unable to achieve concessions associated with its current union contract, and leverage exceeds 5.0 times and remains at this level for several quarters, a negative outlook or rating change could be warranted. If the company is able to successfully implement cost savings ahead of our expectations, and leverage falls below 4.0 times on a sustainable basis, the ratings could experience positive momentum.

Block's pro forma leverage is high for a diversified media company with total debt to EBITDA of 4.3 times, and cash flow coverage is low with (EBITDA-CapEx)/Interest of 1.1 times for the trailing twelve month period ended September 30, 2005. Given that Block has completed the upgrade of its cable system (100% of cable infrastructure rebuilt to 879 MHz) and its Post-Gazette facilities in Pittsburgh, we expect capital expenditures to decline to closer to the maintenance levels (about $40 million), thus improving cash flow coverage over time.

The Ba2 the senior secured credit facilities reflect their senior most position in the capital structure and the debt protection measures detailed in the credit agreement. The facilities are secured by all of the stock and assets of the borrower and its subsidiaries and benefit from subsidiary guarantees. The notch up to Ba2 on this class of debt from the Ba3 corporate family rating reflects the more than ample collateral coverage provided to bank lenders. The B1 ratings on the senior unsecured notes reflect their effective l subordination to the senior secured bank credit facilities although these notes will also benefit from subsidiary guarantees.

Block Communications, Inc. is a diversified media company that operates in the cable television, publishing, television broadcasting industries. Block is privately held by the Block family and is located in Toledo, Ohio.

New York
William L. Hess
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Jason Sevier
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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