New York, March 26, 2020 -- Moody's Investors Service (Moody's) downgraded Salem Media Group,
Inc.'s (Salem) corporate family rating (CFR) and senior secured
notes rating to Caa1 from B3. The outlook was changed to negative
from stable.
The downgrade reflects weaker than expected performance that Moody's
projects will persist in the next few quarters. Leverage has increased
to 6.6x as of Q4 2019 from 6.0x as of Q4 2018. Results
have continued to be impacted by the shift of ad dollars to digital mobile
and social media, competitive conditions for local radio ad dollars,
and declines in local block programming revenue. Free cash flow
generation has continued to deteriorate and was only modestly positive
in 2019. The coronavirus outbreak is also expected to lead to lower
revenue and EBITDA levels in the near term and higher leverage levels.
A summary of Moody's actions are as follows:
Downgrades:
..Issuer: Salem Media Group, Inc.
.... Corporate Family Rating, Downgraded
to Caa1 from B3
.... Probability of Default Rating,
Downgraded to Caa1-PD from B3-PD
....Gtd Senior Secured 1st lien Notes due
2024, Downgraded to Caa1 (LGD4) from B3 (LGD4)
Outlook Actions:
..Issuer: Salem Media Group, Inc.
....Outlook, changed to Negative from
Stable
RATINGS RATIONALE
Salem's Caa1 CFR reflects the company's very high leverage of 6.6x
as of Q4 2019 (excluding Moody's lease adjustments) and a weak free cash
flow-to-debt ratio of 1% in 2019. The company
has operations in broadcasting, digital media, and publishing
focused on Christian and conservative content. Overall broadcast
performance is vulnerable to the secular pressures in the radio industry
due to increased competition for ad dollars from digital and social media
companies and for listeners from digital music providers. While
Salem's broadcast revenue is supported by rate increases from national
block programming operations, overall performance has been weak
with an EBITDA decline of 18% in 2019 as calculated by Moody's.
Salem's size is very small with revenue of $254 million in
2019 which elevates the volatility in performance. The company
has a leading market position in Christian teaching and talk format and
Moody's expects its national block programing revenue will be more stable
compared to the other revenue streams of the company. National
block programming is less reliant on advertising dollars due to its recurring
nature, although its local block programing has declined.
The station portfolio is largely in the top 25 markets with the vast majority
of signals on the less attractive AM band. While the company has
a broad footprint, there is geographic concentration as Salem's
top two markets (Los Angeles and Dallas) accounted for approximately 22%
of net broadcasting revenue in 2019.
A governance impact that Moody's considers in Salem's credit profile is
the moderately aggressive financial policy. While free cash flow
and asset sale proceeds have been used to repay debt over the past several
years, the distribution to equity holders has continued despite
weak performance in recent years. The distribution was reduced
in Q4 2019, but continuing the distribution as operations have declined
reduces financial flexibility. Salem has also completed a number
of related party transactions with management and family members which
owns the majority of the economic interest and has voting control of the
company. Salem is a publicly traded company listed on the NASDAQ
Global Market.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. The radio industry could
be significantly affected by the shock given its sensitivity to consumer
demand and sentiment. More specifically, the weaknesses in
Salem's credit profile, including its exposure to discretionary
advertising spend have left it vulnerable to shifts in market sentiment
in these unprecedented operating conditions and Salem remains vulnerable
to the outbreak continuing to spread. Moody's regards the
coronavirus outbreak as a social risk under our ESG framework, given
the substantial implications for public health and safety.
Salem has a weak liquidity profile as reflected in the SGL-4 speculative-grade
liquidity rating. The company has access to a $30 million
ABL facility due May 2022 that has $12 million drawn as of Q4 2019
and cash on the balance sheet is minimal. Free cash flow of $3
million in 2019 is weak after distributions of $6 million and capex
of approximately $8 million. The distribution was reduced
in Q4 2019 to an annual amount of approximately $2.7 million.
Moody's expects cash flow from operations will decrease in line with EBITDA
in the near term, but the company could reduce capex and distributions
further to support liquidity if needed. Salem has also spent $16.8
million in 2019 to buy back its outstanding debt. Salem's alternative
liquidity is limited as the vast majority of stations are AM signals which
are less attractive given that most listenership has migrated to the FM
band. The ABL facility is subject to a fixed charge coverage ratio
of 1x when availability is less than the greater of 15% of the
maximum revolver amount and $4.5 million for 60 consecutive
days after the threshold amount has been reached.
The negative outlook reflects Moody's view that revenue will decline in
the near term due in part to the coronavirus outbreak's impact on
the economy and leverage will increase well above 7x in 2020. While
EBITDA is projected to improve in 2021, leverage levels are expected
to remain elevated.
Ratings could be downgraded if debt-to-EBITDA was expected
to be above 8x (excluding Moody's lease adjustments), the EBITDA
minus capex to interest coverage ratio declined to less than 1x,
or if free cash flow was negative. A further deterioration of its
liquidity profile or elevated concern about the ability of Salem to service
its debt could also result in a downgrade.
Ratings could be upgraded if debt-to-EBITDA is sustained
comfortably under 6.5x (excluding Moody's lease adjustments) with
stable organic revenue growth and EBITDA margins. A free cash flow-to-debt
percentage in the mid-single digit range would also be required
as well as maintenance of an adequate liquidity profile.
The principal methodology used in these ratings was Media Industry published
in June 2017. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Salem Media Group, Inc., formed in 1986 and headquartered
in Camarillo, CA, is a religious programming and conservative
talk radio broadcaster with integrated business operations including digital
media and publishing. Salem owns or operates 100 local radio stations
(33 FM, 67 AM) in 37 markets. The digital media business
provides digital services including audio and video web streaming of Christian
and conservative themed content as well as digital marketing services.
Salem's publishing business largely publishes books by conservative authors
and offers a self-publishing service. Edward G. Atsinger
III (CEO), Stuart Epperson (Chairman, and brother-in-law
of CEO), Edward C. Atsinger (son of the CEO), Nancy
A. Epperson (Chairman's spouse), and their trusts own a majority
of the economic interest in the company and have voting control through
a dual class share structure with the remaining shares being widely held.
Revenue for the last twelve months ending Q4 2019 was $254 million.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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
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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: 1 212 553 0376
Client Service: 1 212 553 1653
Stephen Sohn
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 1 212 553 0376
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