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Rating Action:

Moody's considers iHeartCommunications' debt exchange a Distressed Exchange

Global Credit Research - 08 Feb 2017

New York, February 08, 2017 -- Moody's Investors Service (Moody's) considers iHeartCommunications, Inc.'s (iHeart) debt exchange of $476 million of senior unsecured notes due 2018 for a like amount of Senior Secured PGN due 2021 to be a distressed exchange. Moody's affirmed the Caa2 corporate family rating (CFR) and the Caa3-PD/LD Probability of Default Rating (with the /LD suffix added for one day). The newly issued 11.25% Priority Guarantee Note (PGN) due 2021 (which will be issued as additional notes under the existing 11.25% PGN indenture) was assigned a Caa1 (LGD2). The outlook remains negative.

Moody's assessed the transaction as comprising a distressed exchange (DE) and a Default due, in part, to the extension of the maturity date beyond its initial terms and the company's very high leverage levels. Accordingly, Moody's has appended the /LD limited default indicator to iHeart's PDR; this will remain for one business day.

As the exchange offer extends the maturity date of a small percentage of debt without a reduction in the amount of outstanding debt and a larger more comprehensive debt restructuring is likely in the near term, the existing Caa2 CFR and debt ratings were affirmed at current levels and the outlook remains negative. The outlook also reflects the negative impact the current strength of the US$ will have on iHeart's financial performance in the near term and the company's largely US$ denominated debt structure.

Affirmations:

..Issuer: iHeartCommunications, Inc.

.... Corporate Family Rating, Affirmed Caa2

.... Probability of Default Rating, Affirmed at Caa3-PD/LD (with the /LD suffix added for one day)

....Senior Secured Bank Credit Facility, Affirmed Caa1 (LGD2)

....Existing Senior Secured PGN Notes, Affirmed Caa1 (LGD2)

....Senior Unsecured LBO Exchange Note, Affirmed Ca (LGD4)

....Senior Unsecured Notes, Affirmed Ca (LGD5)

Speculative Grade Liquidity Rating affirmed at SGL-4

..Issuer: CCU Escrow Corporation (Assumed by iHeartCommunications, Inc.)

....Senior Unsecured note, Affirmed Ca (LGD5)

Assignment:

..Issuer: iHeartCommunications, Inc.

..New Priority Guarantee Note due 2021, Assigned Caa1 (LGD2)

Outlook Actions:

..Issuer: iHeartCommunications, Inc.

....Outlook, remains Negative

RATINGS RATIONALE

iHeart's Caa2 CFR reflects the very high leverage level of 11.9x on a consolidated basis as of Q3 2016 (pro-forma for asset sales, but excluding Moody's standard lease adjustments), negative free cash flow, and weak interest coverage of approximately 0.9x. Higher interest rates following the extension of its debt maturities leave the company vulnerable to a slowdown in the economy given the heightened sensitivity that its radio and outdoor businesses have to consumer ad spending. The combination of higher interest rates and lower EBITDA in the event of a future economic downturn could materially impair its already weak interest coverage and liquidity position. In addition, there are secular pressures on its terrestrial radio business that could weigh on results as competition for advertising dollars and listeners are expected to remain high going forward. Efforts to improve its liquidity position over the past few years have led to higher expenses or lower EBITDA as assets are sold. Also incorporated in the rating, is the expectation that leverage will remain high over the rating horizon compared to the underlying asset value of the firm and the company will remain poorly positioned to withstand an economic recession or any material weakness in terrestrial radio in the future.

Despite the company's highly leveraged balance sheet, iHeart possesses significant share, geographic diversity and leading market positions in most of the over 150 markets in which the company operates. The company benefits from the strength of its iHeartRadio service and its live events as well as the outperformance of its terrestrial radio business. The rating also reflects the 90% ownership stake in Clear Channel Outdoor Holdings Inc. (CCOH) which is one of the largest outdoor media companies in the world, although it is not a guarantor to iHeart's debt. Its outdoor assets generate attractive EBITDA margins, good free cash flow, and will benefit from digital billboards that offer higher EBITDA margins than static billboards.

The SGL-4 liquidity rating reflects the company's weak liquidity profile, although we expect iHeart will continue to make required interest and principal payments in the near term. The company has a $543 million cash balance as of Q3 2016 (which includes $394 million held at CCOH). In October 2016, the company sold its International outdoor business in Australia for cash proceeds of $204 million which increases the cash available at CCOH. iHeart's $535 million ABL revolver matures in December 2017 and has $230 million outstanding on the facility as of Q3 2016 and an additional draw of $100 million was made in Q4 2016. We expect the company will also look to extend the 2017 maturity of its ABL revolver in the near term. In July 2016, iHeart's subsidiary repurchased $383 million of its 10% senior notes due 2018 at a discount for an aggregate purchase price of approximately $222 million. Following the recent exchange offer, $374 million of 10% senior notes due 2018 will remain outstanding with $262 million owned by the company's subsidiaries. In addition, $175 million of 6.875% senior notes are also due in 2018. In 2019, $8.3 billion of debt comes due which increases the need to improve its balance sheet if the company is to avoid a default at maturity. We project free cash flow to be negative for the foreseeable future absent a dramatic reduction of its debt obligations, although the company is expected to continue to have the ability to sell assets to enhance its liquidity position. The company has spent $305 million in capex over the LTM as of Q3 2016 and we expect capex will continue in this range going forward.

iHeart has a Corporate Services Agreement with CCOH that allows for free cash flow generated at CCOH to be up streamed to iHeart. There is a revolving promissory note due from iHeart to CCOH in the amount of $770 million as of Q3 2016 which is payable on demand. We expect the amount due to generally remain below $1.15 billion (given current ownership and shares outstanding) as balances at approximately that level would likely lead to a demand for a paydown and a subsequent dividend to all shareholders (iHeart would receive approximately 90% given their ownership position).

iHeart has a substantial cushion under its secured leverage covenant of 8.75x as of Q3 2016 (which excludes the senior notes at Clear Channel Worldwide Holdings, Inc.). The current secured leverage metric defined by the terms of the credit agreement, is calculated net of cash, at 6.6x as of Q3 2016. The company also has the ability to buy back its term loans through a Dutch auction.

The recent exchange offer reduces the amount of unsecured debt in the capital structure which would absorb a materially higher loss rate than the senior secured debt in a default scenario. Additional reductions in unsecured debt would likely lead to a downgrade of the senior secured debt ratings to Caa2 which would be in line with the current Caa2 CFR.

The negative outlook reflects the elevated risk of a restructuring of iHeart's debts which Moody's would likely characterize as a Limited Default. We expect EBITDA growth to be relatively flat to negative in 2017 due to the headwinds expected from the strong US$ and the decline in political ad spend in 2017 which will offset positive growth on a constant currency basis at its international operations. Additional asset sales to improve liquidity are also possible which would reduce EBITDA and lead to higher leverage.

An upgrade in the near term is unlikely due to the high leverage, weak liquidity, and the risk of another distressed exchange. However, a reduction in leverage to well under 10x with sustained revenue and EBITDA growth could lead to an upgrade. Free cash flow would have to be positive with a free cash flow to debt ratio of at least 1.5%. Confidence that any pending debt maturities would be met would also be required.

The rating would be downgraded if EBITDA were to materially decline due to economic weakness or if secular pressures in the radio industry escalate so that leverage increased above 13x. Ratings would also be lowered if a default was likely and another distressed exchange would likely be considered a Limited Default by Moody's. A deterioration in its liquidity position could also lead to negative rating pressure.

The principal methodology used in these ratings was Global Broadcast and Advertising Related Industries published in May 2012. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

iHeartCommunications, Inc. (iHeart) (fka Clear Channel Communications, Inc.) with its headquarters in San Antonio, Texas, is a global media and entertainment company specializing in mobile and on-demand entertainment and information services for local communities and advertisers. The company's businesses include digital music, radio broadcasting and outdoor displays (via the company's 90% ownership of Clear Channel Outdoor Holdings Inc. ("CCOH")). iHeart's consolidated revenue for the LTM period ending Q3 2016 was approximately $6.3 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Scott Van den Bosch
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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