Salem Media Group Inc. Ratings Lowered To 'B-' From 'B' On Falling Revenues And Rising Leverage; Outlook Stable

  • U.S. radio broadcaster Salem Media Group Inc. underperformed our expectations in 2018 due to ongoing revenue declines in local block programming, core radio advertising, digital advertising, and publishing. As a result, leverage increased to 6x in 2018 from 5.5x in 2017.
  • We are lowering our issuer credit rating on Salem to 'B-' from 'B' to reflect our expectation that weak operating performance will continue in 2019, causing leverage to remain elevated at around 6x.
  • At the same time, we are lowering our issue-level rating on the company's senior secured notes to 'B-' from 'B'.
  • The stable outlook reflects our expectation that Salem's leverage will remain around 6x over the next year as debt repayment is offset by declining revenue and EBITDA as a result of continued softness in local block programming, local advertising, and digital revenue.
CHICAGO (S&P Global Ratings) April 12, 2019--S&P Global Ratings today took the rating actions listed above. The downgrade reflects our expectation that leverage will remain higher than our previous 5.5x threshold to maintain the 'B' issuer credit rating over the next few years. This is happening because of increased competition for local block programming, secular pressures in radio advertising and publishing, and lower revenue at key websites due to competition from alternative media.
Revenue from local block programming continued to decline in 2018, causing total block programming revenue to decline despite 2.5% revenue growth from national block programming (a rebound from a 1.7% decline in 2017). At the same time, Salem's profitability was affected by investments made in its digital marketing platform in an effort to drive revenue growth. The combination of these factors has caused us to lower our projected EBITDA in 2019 by about 8.5%. However, we expect the company will maintain adequate liquidity with free operating cash flow (FOCF) of $10 million to $15 million over the next year and no near-term debt maturities.
We expect the company will continue to pay a quarterly dividend since its founders (currently the CEO and chairman) own around 50% of outstanding shares. As a result, we expect that after dividends, Salem will generate roughly $4 million to $8 million of discretionary cash flow over the next 12 months. While Salem has a history of pursuing tuck-in acquisitions, we expect the company will use its discretionary cash flow to continue repurchasing its senior secured notes. Salem opportunistically repurchased $16.4 million of these notes at a discount to par in 2018, which was partially funded with its asset-based loan (ABL) facility.
The stable outlook reflects our expectation that Salem's leverage will remain around 6x over the next year, as debt repayment is offset by declining revenue and EBITDA as a result of continued softness in local block programming, local advertising, and digital revenue.
We could lower the rating if Salem's revenue declines accelerate due to increased competition in block programming or an acceleration in the secular decline of spot radio advertising. This could result in minimal annual FOCF generation and an inability to reduce debt to offset the revenue decline, even if Salem were to eliminate its dividend. In this scenario, if leverage is sustained at near 7x, we could view the capital structure as unsustainable.
While unlikely over the next year, we could raise the rating if Salem grows revenue, increases FOCF to debt to more than 10%, and reduces leverage to less than 5x on a sustained basis. This could occur if the company's broadcast revenues stabilize or its digital operations see significant growth, while the company also keeps its current dividend and uses excess cash flow to reduce debt.
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