Fitch Affirms iHeartCommunication's IDR at 'CCC'; Removes Negative Outlook
On Feb. 19, 2015, iHeart priced an offering of \$950 million of 10.625% priority guarantee notes (PGN) due 2023 (the issuance was upsized from initial guidance of \$550 million.) Proceeds are to be used to fully prepay remaining amounts outstanding and due in 2016 under its term loan B (\$916.1 million) and term loan C asset sale facility (\$15.2 million) and to pay accrued and unpaid interest and associated offering fees. Fitch views the transaction favorably as it significantly reduces iHeart's 2016 maturity wall, which compensates for the expected increase in total interest expense.
With the successful refinancing of its term loan maturities, iHeart now has only \$193 million of remaining 2016 maturities. These maturities can be addressed using several levers available to the company, including cash on hand (approximately \$271 million as of Dec. 2014 excluding cash at CCOH), a \$535 million asset-based lending (ABL) facility (subject to an undisclosed borrowing base and a total leverage covenant), or non-core asset sales (iHeart recently announced the sale of non-core tower assets for approximately \$400 million).
Although iHeart no longer carries a Negative Outlook, this is most likely a temporary reprieve as two significant issues remain. Fitch calculates annual pro forma interest expense of approximately \$1.7 billion which, when combined with expected cash taxes and capital expenditures results in negative free cash flow (FCF) for at least the next two years. The second involves ability to address intermediate term debt maturities: \$909 million matures in 2018 while \$8.3 billion matures in 2019.
KEY RATING DRIVERS
--The ratings reflect iHeart's highly leveraged capital structure. Fitch estimates pro forma total and secured leverage of 11.6x and 7.1x, respectively, as of the LTM ended Dec. 31, 2014. Total leverage exceeds levels at the leveraged buyout, as a weak operating profile has limited EBITDA growth and FCF generation. EBITDA has not returned to pre-downturn levels.
--The ratings reflect the limited tolerance for further erosion of iHeart's operating profile and its liquidity position.
--Fitch recognizes that the company completed a series of capital market transactions which have extended a material amount of its secured maturities to 2019 and beyond, providing much needed financial flexibility.
--Fitch expects iHeart's FCF to be negative over at least the next two years reflecting the interest burden associated with the company's capital structure and operating profile.
--iHeart should be able to meet its remaining 2016 maturities totalling approximately \$193 million given the levers discussed above.
Overall, Fitch's ratings reflect the company's highly leveraged capital structure and Fitch's expectation that the company's considerable and growing interest burden will hinder near-term FCF generation. In addition, iHeart's operating profile is subject to ongoing technological threats and secular pressures in radio broadcasting along with exposure to cyclical advertising revenue. The ratings are supported by the company's leading position in both the outdoor and radio industries, as well as the positive fundamentals and digital opportunities in the outdoor advertising space.
Fitch's key assumptions within the rating case for the issuer include:
--iHeart is strongly positioned within a secularly challenged radio sector;
--Fitch does not expect a material amount of improvement of iHeart's credit profile or absolute debt reduction over the next several years, given the expected negative FCF;
--Potential asset sales, including the announced sale of 411 broadcast communication tower sites for \$400 million, could support iHeart's liquidity position;
--Although iHeart has successfully addressed its 2016 maturities, the company will still have to contend with maturities of approximately \$900 million in 2018 and \$8.3 billion in 2019.
Liquidity and Debt
Fitch regards iHeart's current liquidity as limited. As of Dec. 31, 2014, iHeart had approximately \$271 million in cash, excluding \$186 million in cash held at CCOH). Backup liquidity consists of the ABL facility that matures in December 2017 and is subject to a springing maturity. The prepayment of iHeart's term loans will ameliorate the springing lien concern at this time.
Recovery Ratings (RRs)
iHeart's RRs reflect Fitch's expectation that the enterprise value of the company will be maximized in a restructuring scenario (going concern), rather than a liquidation. Fitch employs a 6x distressed enterprise value multiple reflecting the value of the company's radio broadcasting licenses in top U.S. markets. Fitch assumes going-concern EBITDA at \$860 million and that iHeart has maximized the debt-funded dividends from CCOH and used the proceeds to repay bank debt. In addition, Fitch assumes that iHeart would receive 90% of the value of a sale of CCOH after the CCOH creditors had been repaid. Fitch estimates the adjusted distressed enterprise valuation in restructuring to be approximately \$7 billion.
The 'CCC/RR4' rating for the bank debt and secured notes reflect Fitch's estimate for a recovery range of 31%-50%. Fitch expects no recovery for the senior unsecured legacy notes, the new 10% senior notes, and senior guarantee notes due to their position below the secured debt in the capital structure, and they are assigned 'RR6'. However, Fitch rates the senior guaranteed notes 'CC' given the subordinated guarantee.
CCOH's RRs also reflect Fitch's expectation that enterprise value would be maximized as a going concern. Fitch stresses outdoor EBITDA by 15%, and applies a 7x valuation multiple. Fitch estimates the enterprise value would be \$4 billion. This indicates 100% recovery for the unsecured senior notes. However, Fitch notches the debt up only two notches from the IDR given the unsecured nature of the debt. In Fitch's analysis, the subordinated notes recover in the 31% to 50% 'RR4' range, leading to no notching from the IDR.
Negative: Cyclical or secular pressures on operating results that further weaken credit metrics or liquidity position could result in negative rating pressure. Additionally, indications that a distressed debt exchange is probable in the near term would also drive a downgrade.
Positive: Fitch's sensitivities do not currently anticipate a rating upgrade.
As of Dec. 31, 2014, iHeart had approximately \$20.6 billion in consolidated debt. Pro forma for the recent PGN issuance and resultant term loan repayments, debt held at iHeart was \$15.7 billion and consisted of:
--\$6.3 billion secured term loans due 2019;
--\$6.3 billion secured PGNs, maturing 2019-2023;
--\$1.7 billion in senior unsecured 12% cash pay / 2% PIK notes maturing in February 2021;
--\$730 million senior unsecured 10% notes due 2018 (net of FinCo holdings of \$120 million);
--\$668 million senior unsecured legacy notes, with maturities of 2016-2027 (net of FinCo holdings of \$57 million.)
Debt held at Clear Channel Worldwide Holdings, Inc. (CCWH) was \$4.9 billion and consisted of:
--\$2.7 billion in senior unsecured 6.5% notes due 2022;
--\$2.2 billion in subordinated 7.625% notes due 2020.
Fitch has affirmed the following ratings:
--Long-term IDR at 'CCC';
--Senior secured term loans at 'CCC/RR4';
--Senior secured priority guarantee notes at 'CCC/RR4';
--Senior unsecured guarantee notes due 2021 at 'CC/RR6';
--Senior unsecured legacy notes at 'C/RR6'.
Clear Channel Worldwide Holdings, Inc.
--Long-term IDR at 'B';
--Senior unsecured notes at 'BB-/RR2';
--Senior subordinated notes at 'B/RR4'.
The Rating Outlook for Clear Channel Worldwide Holdings, Inc. is Stable.