S&P: Salem Media Group Inc. Outlook Revised To Stable From Negative; 'B-' Rating Affirmed
We also affirmed our 'B-' issue-level rating on the company's senior secured term loan. The '3' recovery rating is unchanged, indicating our expectation for meaningful recovery (50%-70%; upper half of the range) of principal in the event of a payment default.
"The revised outlook reflects Salem Media's wider-than-expected covenant headroom in the first half of 2016, and our expectation that the covenant EBITDA headroom will be at a high-single-digit to low-teens percentage level over the next 12 months," said S&P Global Ratings credit analyst Heidi Zhang. The wider covenant headroom mainly reflects better performance in the company's digital media segment as it improves its mobile monetization efforts in an effort to offset declines from Facebook-sourced traffic, which fell to about 15% in the first half of 2016 compared to 50% a year earlier.
"The stable rating outlook reflects our expectation that Salem Media's leverage will be in the low - to mid-5x area and its covenant EBITDA headroom will be in the high-single-digit to low-teens percentage level over the next 12 months," said Ms. Zhang.
We could consider lowering our corporate credit rating on Salem Media if the company underperforms our base-case expectation of low - to mid-single-digit percentage revenue growth. Under this scenario, the company's liquidity would decline, which would cause its margin of covenant compliance to fall below 5% and increase the risk of covenant violation. Factors that could contribute to this scenario include material business weakness or any debt-financed acquisitions that cause leverage to increase.
We could consider an upgrade if we believe the company will have adequate liquidity and a covenant headroom greater than 15% over the next 12 months. This would likely require adjusted EBITDA growth in the mid-single-digit percentage area over the 12 months or more debt repayment.