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
