MOODY'S ASSIGNS "b3" RATING TO AMERICAN RADIO SYSTEMS' PREFERRED STOCK AND Ba2 TO ITS NEW BANK FACILITY; CONFIRMS ITS B2 SUB DEBT RATING AND PLACES EZ COMMUNICATIONS' SUB DEBT RATING UNDER REVIEW FOR UPGRADE
NEW YORK, 2/24/1997 -- Moody's assigned a "b3" rating to the $200 million of 11.375% exchangeable preferred stock issued recently by American Radio Systems and confirmed the B2 rating on its $175 million of 9% senior subordinated notes. Moody's also assigned a Ba2 rating to the company's new $900 million three-tranche secured bank facility, withdrawing the Ba2 rating on its prior $300 million facility. In addition, Moody's placed the B2 rating of EZ Communications' $150 million of 9.75% senior subordinated notes under review for possible upgrade. In August 1996, American Radio agreed to acquire EZ for an aggregate consideration of about $650 million, including approximately $346 million in cash and assumed debt and $306 million in stock based on American Radio's stock price at the time the acquisition was announced.
The review of the EZ notes reflects the consent given by American Radio's 9% noteholders in December, which permits EZ's notes to become direct obligations of American Radio and rank senior in right of repayment, thus improving their relative rank. Assuming no material announcements between today's date and the closing, which is expected later in March, Moody's will upgrade the EZ notes one notch to B1 and withdraw the Ba2 rating on EZ's $125 million secured bank facility. For the 30 days following the closing, EZ's 9.75% noteholders can either put their notes to American Radio at 101% of their principal amount due to the change of control or remain as a senior creditor of American Radio. The B2 rating on American Radio's 9% senior subordinated notes reflects that security's rank below the EZ notes.
All of the ratings reflect American Radio's continued aggressive acquisition strategy and its likely use of bank debt availability to finance its next series of acquisitions; its relatively high debt leverage and weak debt service coverage due to the acquisition of many stations which are marginally profitable or unprofitable on a trailing basis; and general concern about the cyclicality of radio advertising revenues, despite the radio industry's long trend of revenue growth. They are supported by the company's leading share in most of its markets and its repeated use of equity, either to raise additional capital or to use as currency toward acquisitions. The company is also well diversified geographically and within its markets. Moody's also believes the company has a relatively deep management team with considerable radio experience to handle the challenging integration of its rapidly expanding station group.
The "b3" preferred stock rating reflects that security's junior rank. Moody's believes the preferred stockholders bear significantly more risk of full repayment than the bank creditors and public noteholders. In a distressed scenario, recoveries on the exchangeable preferred would share ratably with any unconverted shares of American Radio's $137.5 million of 7% convertible preferred stock, which rank pari passu. Moody's does not rate the convertible preferred, which does not have registration rights. Even if American Radio executes a permitted exchange, the exchange debentures will remain junior in rank to all of the company's current pro forma debt, and will not benefit from upstream guarantees as the bank and public debt does.
The Ba2 bank debt rating reflects the strong collateral coverage, even if radio transaction multiples decline to levels experienced in the early 1990's. The banks have benefited from over $1.1 billion of junior capital, on a book basis, used by American Radio to accomplish its acquisition strategy. Pro forma for all pending transactions, approximately $360 million of the facility will be drawn. Up to $150 million may be drawn under a single-draw term loan to repurchase any EZ notes put to the company. Even if, as Moody's expects, American Radio uses most of the remaining $425 million of bank availability for its next series of acquisitions, collateral coverage should remain strong. The banks will receive a pledge of the acquired assets to add to the collateral pool.
The EZ acquisition gives American Radio strong market shares in Seattle, Washington; St. Louis, Missouri; and Charlotte, North Carolina, and adds to its Sacramento, California station group. EZ has several pending acquisitions, sales, and swaps, although the incremental capital need for those transactions is minimal. American Radio also recently acquired two stations in Baltimore for $90 million cash and plans to sell two stations in Omaha, Nebraska for $38 million cash. In addition, the company has other pending acquisitions, swaps, and sales requiring net capital of about $205 million, for which pro forma information is not provided by the company. These stations will add to American Radio's market positions in San Jose and Sacramento, California; Rochester, NY; and West Palm Beach, Florida, among others.
American Radio has a separate unrestricted subsidiary established to manage, develop, operate, and lease communications antenna towers and tower sites throughout the U.S. for its radio stations and third parties. Through December 1996, the company has invested about $30 million as equity. The tower subsidiary has in place a $90 million term loan secured by the tower assets and lease contracts, with no recourse to American Radio's assets. The facility will be partially drawn to make pending acquisitions totaling about $75 million. Over the near-term, Moody's does not expect American Radio to make material additional equity investments in the tower subsidiary, nor do we expect it to be a source of significant dividends or be sold for significant value. As such, the effect of the tower operations on American Radio's ratings is neutral.
American Radio Systems and EZ Communications are radio groups which, on a combined basis, will operate 93 stations in 19 markets. American Radio is headquartered in Boston, Massachusetts. EZ Communications is currently headquartered in Fairfax, Virginia.
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