S&P Global Ratings downgraded Clear Channel Outdoor Holdings Inc. (CCOH) to ‘CCC+’ from ‘B-’ and lowered its issue level ratings on its debt by one notch in concert with the issuer credit rating. The recovery ratings remain unchanged.
S&P assigned a ‘B’ issue-level and ’1′ recovery rating on the proposed $350 million senior secured notes issued by the company’s indirect subsidiary CCIBV.
S&P does not expect CCOH to generate any significant FOCF until 2023. The downgrade reflects S&P’s view that CCOH’s higher debt burden and additional interest expense from the proposed $350 million senior secured note issuance will reduce the company’s free operating cash flow (FOCF) by roughly $25 million annually, resulting in negligible cash flow generation in 2021 and 2022 on roughly $5.5 billion of reported debt. S&P expects the coronavirus pandemic and resulting recession will cause substantial advertising revenue declines for out-of-home advertisers over the next year. EBITDA for 2020 will decrease significantly from 2019 levels and FOCF will be in the negative $250 million to negative $300 million range. While S&P previously expected the company to return to generating positive FOCF in 2021, the rating agency now believes that the incremental interest will keep cash flow roughly break-even to negative through 2022. S&P believes the absence of a track record of cash flow generation increases the refinancing risks associated with the company’s senior unsecured notes due 2024.
Advertisers have pulled back on their marketing plans due to stay-at-home measures. S&P now forecasts that real U.S. GDP will contract by 5.2% in 2020 (substantially worse than the rating agency’s March forecast for a 1.3% decline) and expect the company’s advertising revenue to decline due to reduced consumer confidence and spending. Furthermore, government efforts to contain the virus have encouraged consumers to remain in their homes, which has hurt out-of-home advertisers. CCOH generates a sizable portion of its U.S. revenue from billboards in large markets, where there have been stricter containment measures due to the higher likelihood of rapid transmission. S&P also expects CCOH’s European segment will face steep advertising declines due to strict stay-at-home orders and city-based nature of its European operations. The company also has a sizeable presence in smaller U.S. markets, where traffic volume has improved since late March and advertising declines have not been as significant. Given the longer lead times for out-of-home advertising, S&P expects the company’s revenue to decline the steepest during the second quarter before its results begin to gradually improve in the second half of the year. Specifically, S&P expects spending on out-of-home advertising to decline over 20% in the U.S. in 2020.
CCOH’s reported margins will decline; however, S&P believes the company can cut some costs to partially cushion the blow. The rating agency expects CCOH to cut back on certain costs, such as pay increases and variable lease expenses, which will decline if its displays aren’t generating revenue. However, operating lease and minimum transit and municipal guarantee payments accounted for about two-thirds of the company’s operating expenses in 2019. The company expects to reduce its second-quarter operating expenses by about $100 million from second-quarter 2019, although S&P believes this will be insufficient to offset the material decline in the company’s revenue. S&P believes most of the company’s cost savings will come from Europe, where the company has converted many of its minimum guarantee contracts with municipalities to revenue-sharing agreements or defer its minimum guarantee payments over the short term. CCOH may also be able to renegotiate the payment terms with its U.S. billboard landowners and transit partners to reduce or defer its required payments in 2020.
Liquidity remains sufficient to weather the recession. Pro forma for the notes issuance and the sale of Clear Media in May, CCOH had about $885 million of cash at the end of its first quarter, including $150 million drawn on its revolver at the end of March. CCOH has also announced a number of measures to preserve its liquidity, including reducing operating expenses, renegotiating or deferring lease and minimum payment guarantees to landowners and municipalities, and reducing growth capital expenditures. Despite these cost reductions, S&P expects the company will burn about $250 million of FOCF over the next 12 months, including about $335 million-$345 million of interest payments and about $100 million-$120 million of capital expenditures. The company’s largest interest payments occur in the first and third quarters of each year, when about $140 million-$145 million is due.
CCOH amended its covenant established by its revolving credit facility in June 2020. As a result of this amendment, the company has suspended the requirement that its first-lien net leverage ratio not exceed 7.6x from third-quarter 2020 through second-quarter 2021. The amendment also delays the timing of the financial covenant stepdown of the first-lien net leverage ratio to 7.1x, which was originally set to occur in second-quarter 2021 until first-quarter 2022. During the suspension period, CCOH must maintain minimum liquidity of $150 million, including cash on hand and availability under the company’s receivables-based credit facility and revolving credit facility. The covenant amendment alleviates liquidity concerns and S&P expects it will comply with the revolving credit facility covenants once they are reinstated in 2021.
The stable outlook reflects S&P’s view that the company has sufficient liquidity and monetizable assets, if needed, to weather the recession and the rating agency does not expect the company to face a credit or payment crisis over the next 12 months.
“We could lower the rating if we expect CCOH to face a payment default or pursue a debt restructuring over the next 12 months. This could occur if an economic recovery stalls or is much slower than expected, or if a second wave of the coronavirus causes stay-at-home directives to be reinstated resulting in the deterioration of the company’s liquidity position,” S&P said.
“We could raise the rating if we see evidence that the economy is recovering and believe the risk that CCOH’s markets may suffer a setback from additional waves of COVID-19 is low. In this scenario, we would expect CCOH to generate positive FOCF in 2021 and 2022, and repay its debt using its cash flows or via asset sale proceeds,” the rating agency said.