MOODY'S ASSIGNS (P)Ba2 TO SECURED BANK FACILITY AND B2 TO SENIOR SUB NOTES OF AMERICAN RADIO SYSTEMS; OUTLOOK POSITIVE
NEW YORK, 01-29-96 -- Moody's assigned a (P)Ba2 rating to American Radio Systems' proposed $300 million secured reducing revolving credit facility and a (P)B2 rating to its proposed $150 million senior subordinated notes. The outlook is positive. The ratings assume the company will raise about $100 million in a concurrent secondary stock offering. The notes offering, however, is not conditioned on the stock offering. If the stock offering does not proceed, Moody's might adjust the ratings downward. After giving effect to pending acquisitions, American Radio will operate radio stations in 7 top-50 markets.
The ratings reflect concerns that the company will continue to aggressively acquire stations and releverage its balance sheet; potential operating and capital risk with respect to its station loan investments due to uncertainties about changes in ownership regulations; the expectation that it will make large investments in a subsidiary set up to own and lease towers; the potential for additional labor strikes, which may affect the timing of its revenues derived from its broadcast rights with several professional sports teams in Boston, Massachusetts; and Moody's view that the advertising cycle is near the top and growth will slow down or even decline.
However, the ratings are supported by the company's dominant position in most of its markets and efficiencies it has achieved through 6 FM duopolies and 1AM duopoly; the prospect for further dominance and efficiences through potential acquisitions of third FM stations in 5 markets, which have essentially been paid for through station loans; the significant amount of equity it has raised; and the geographic diversification and strong growth of its cash flow.
The bank debt rating reflects good collateral coverage, driven by the substantial combined value of the existing and future stations that would be acquired using the bank facility and the significant amount of junior capital raised to help finance the acquisitions. The banks do not have a pledge of the assets or stock of the tower subsidiary, though American Radio's creditors would benefit from any dividends upstreamed or any equity value if the subsidiary was sold. The notes rating reflects the likely incurrence of senior debt.
The outlook is positive. Moody's believes there is greater than a 50-50 chance that triopolies will be permitted in the company's markets. The FCC has granted 1-year waivers in several radio transactions which allow triopolies to exist and has made comments suggesting a permanent easing of the rules, which currently allow a company to own no more than 2 FM and/or AM signals in a single market. However, the rating is held back by the possibility that triopolies may not be allowed, and the company would need to unwind its station loans. Radio values have increased, as industry consolidation has accelerated due to the anticipated relaxation of ownership restrictions. Values would likely decline if Congress reversed course, which may affect whether the station loans are fully recoverable.
Proceeds will pay down about $140 million of bank debt and about $18 million total to fund station loans in Buffalo, New York, Stuart, Florida, and Jensen Beach, Florida, and a pending acquisition in Dayton, Ohio. The company will have excess cash of about $80 million and the availability of the entire $300 million bank facility. Potential uses could include the exercise of an option to acquire 3 stations in Austin, Texas for $29 million and the acquisition of 2 FM stations in an existing market for $12 million which is under a non-binding letter of intent.
American Radio was formed in 1993 through the merger of four predecessor entities - Stoner Broadcasting Systems, Atlantic Radio, Multi-Market Communications, and Boston AM Radio. The company has since sold its stations in Louisville, Kentucky; Des Moines, Iowa; and Binghamton, New York, and focused on building its presence in Boston; Hartford, Connecticut; Buffalo, New York; Rochester, New York; and Dayton, Ohio. It also entered the West Palm Beach, Florida and Baltimore, Maryland markets.
A critical element of American Radio's strategy has been to use a station loan structure to control 3 FM stations in a single market. In 5 of its markets, it has or will enter into station loan investments totaling about $64 million. In general, the company signs a purchase contract for the station, then lends the owner nearly 100% of that price. The owner continues to program the station, while the company's loan receives interest, requires most of net cash flow to be paid toward the loan, and restricts dividends and the incurrence of additional debt. If triopolies are eventually allowed, then American Radio will acquire the station, but the owner must repay its loan to the company, so the company's net cash need is nominal. If triopolies are not permitted, then the company can either assign the purchase contract to a third party or continue in its role as a lender.
To help finance over $125 million of completed acquisitions and $45 million of completed station loans, the company raised $14 million in private equity in 1994 and did a $70 million initial public stock offering in June 1995. With this new stock offering, it will have raised over $200 million of equity as a merged entity.
American Radio's combined revenue shares for its existing markets are in excess of 20% in 5 of its markets and its ranks first, second, or third in all 7 markets. Pending transactions in Hartford, Buffalo, and Dayton would increase shares in those markets further. Its dominance gives it considerable leverage with local advertisers. Many of its individual stations are ranked first or second for the formats' target demographic market, and the company employs a wide range of formats in each market so as not to compete against itself.
Moody's expects the company to add stations in markets where its combined revenue share is second or third, and to enter new markets of comparable size and employ the same strategy.
American Radio also plans to establish a tower subsidiary. It will likely sell its own towers to the subsidiary and lease them back. The subsidiary may also acquire or construct new towers, and seek to obtain leases from wireless communications providers. The bank facility and notes indenture permit the company to invest at least $25 million in this subsidiary and to leverage it with secured debt, if desired. American Radio will likely use some of its excess cash to put equity into this new operation.
American Radio's debt, pro-forma for definitive acquisitions, will start at about 5.3 times the $28.5 million EBITDA for the 12 months ended September 1995. However, its ratio of debt, net of excess cash, to EBITDA is less than 3.0 times EBITDA. With the excess cash, it can thus make some acquisitions which add EBITDA without incurring new debt, so Moody's regards the ratio to be in the 4.0-5.0 times range. After-tax cash flow covers interest about 1.5 times.
American Radio is headquartered in Boston, Massachusetts and is one of the largest pure radio operators in the U.S. with 21 owned stations in 7 top-50 markets and definitive agreements for another 9 stations in those markets.
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