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Related Issuers
Rating Action:

Moody's downgrades Salem Media's CFR to Caa1; outlook changed to negative

26 Mar 2020

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 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: 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.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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