TEXT-S&P cuts The Washington Post Co ratings
Overview -- Deteriorating operating performance at the Kaplan higher education and newspaper divisions of U.S. media and education company Washington Post Co. is hurting revenue and EBITDA, and we expect this to continue. -- We expect that weaker higher education and newspaper segment operating performance trends will continue over the near-to-intermediate term, prompting our diminished assessment of the company's business mix and earnings potential. -- We are lowering our long-term rating on the company to 'BBB' from 'BBB+'. We are also lowering our rating on the company's commercial paper to 'A-3' from 'A-2'. -- The negative rating outlook reflects our view that the company will face significant execution risks in stabilizing its education and newspaper businesses. Rating Action On Sept. 20, 2012, Standard & Poor's Ratings Services lowered its corporate credit rating and its senior unsecured issue-level rating on Washington, D.C.-based Washington Post Co. to 'BBB' from 'BBB+'. We also lowered our short-term and commercial paper (CP) rating on the company to 'A-3' from 'A-2'. We removed the ratings from CreditWatch, where they were placed with negative implications on Aug 28, 2012. The rating outlook is negative. Total debt outstanding at June 30, 2012, was $456 million, and cash and investments in marketable equity securities were $688 million. Rationale The downgrade reflects the risk that that operating performance and discretionary cash flow will remain depressed as a result of more restrictive regulation of for-profit education businesses, as well as our expectation that continued declines in newspaper advertising revenues will outweigh the company's cost-reduction measures. The company has experienced sharply negative year-over-year trends in student enrollment and profitability since 2010, as a result of U.S. Department of Education (DoE) regulations that significantly tighten marketing practices. Also, the company is revising its business practices and implementing measures to reduce student loan default rates, which have contributed to lower enrollment levels. While we do not anticipate significant weakening of the company's modest leverage or excess liquidity, we expect that earnings diversity will narrow as education and newspaper segment profitability declines. These risks have prompted us to slightly revise our assessment of the company's business mix, earnings, and discretionary cash flow potential. We view Washington Post Co.'s business risk profile as "fair," mainly reflecting our view that the cable and broadcasting businesses offer an element of stability to profitability and cash flow that temper the unfavorable fundamentals of the education and newspaper businesses. The company has a "modest" financial risk profile, in our view, because of modest debt leverage and excess cash and investments. The company's cable and broadcasting operations provide modest diversification, although they face a variety of long-term risks. Cable operations, accounting for nearly half of EBITDA, have a solid competitive position in smaller communities in 19 Midwestern, Western, and Southern states. EBITDA benefits of high-speed data and telephony services since 2008 have been more than offset by basic and digital subscriber erosion, resulting from increased satellite and digital subscriber-line competition. Operating performance of the broadcasting segment's group of six top-50 market TV stations (accounting for nearly one-quarter of EBITDA) is cyclical and sensitive to the timing of elections, but generates good cash flow. The company's newspaper operations largely consist of its flagship newspaper, The Washington Post, which is minimally profitable, despite cost reductions, due to the secular decline in print advertising revenues. We believe that the unit is unlikely to restore satisfactory profitability, as additional cost cuts may be insufficient to offset long-term pressures of readership declines and advertising moving online. Under our base-case scenario, we expect consolidated revenues to decline at a mid-single-digit percentage rate and that EBITDA could decline at a mid-teen percentage pace in the second half of 2012, with a continued decline in education and newspaper operations more than offsetting broadcasting segment benefits of election advertising. We expect that cable segment operating performance may decline modestly due to increased video programming and sales costs. In 2013 we expect consolidated revenues to decline at a mid-single-digit percentage rate, and that EBITDA could decline at a mid- to high-single-digit percentage pace, stemming from a continued decline in education and newspaper operations and the absence of election revenues improving broadcasting performance. Consolidated revenues declined 5% in the three months ended June 30, 2012, while EBITDA fell 16% largely as a result of a 14% decline in higher education student enrollments. Newspaper segment losses increased as a result of an 8.7% decline in advertising revenues, with a 15% decline in print ad revenues outweighing an 8% increase in much smaller online sales. The EBITDA margin declined to 13.2% for the 12 months ended June 30, 2012, from 16.1% for the prior 12 months. We expect that lease- and pension-adjusted debt leverage could rise to the low-2x area in 2012 and the low-to-mid 2x range in 2013. We associate leverage between 1.5x and 2.0x with a modest financial risk profile, based on our criteria. We expect that lease-adjusted EBITDA coverage of gross interest expense could decline to the low-to-mid 6x range in 2012 and roughly 6x in 2013. We believe that EBITDA conversion to discretionary cash flow will remain depressed at around 15% in 2012 and 2013 owing to the depressed contribution from the education segment and negligible profitability of the newspaper business. The ratio of gross lease-adjusted debt to EBITDA increased to 1.9x for the 12 months ended June 30, 2012, from 1.3x over the prior 12 months. Lease-adjusted EBITDA coverage of gross interest expense declined to roughly 7x from almost 10x over the same period. Discretionary cash flow contracted by 65% to $87 million in the 12 months ended June 30, 2012, versus the prior 12 months, as a result of the effect of weak education and newspaper segment operating performance. In addition, the dividend, which consumes about 45% of operating cash flow, increased 4% for 2012 despite the reduction in profitability. Conversion of EBITDA to discretionary cash flow fell to roughly 15% for the 12 months ended June 30, 2012, from one-third over the same period last year, because of weaker operating performance. Liquidity Our short-term rating on Washington Post Co. is 'A-3'. The company has "strong" liquidity, in our view, which would more than cover its needs over the next 12 to 18 months, and which could withstand sharp, unforeseen EBITDA declines. Our assessment of its liquidity profile includes the following expectations, assumptions, and factors: -- We expect the company's sources of liquidity (including cash, marketable securities, and facility availability) will exceed its uses by 2x or more over the next 12 to 18 months. -- There are no debt maturities over the next 12 months. -- We expect that net sources will be positive over the next 12 months, even with a hypothetical EBITDA decline exceeding 50%. -- The company has a considerable $1.08 billion cushion of compliance with its $1.5 billion minimum consolidated shareholders' equity covenant. Total U.S. and international higher education assets were $645.8 million as of June 30, 2012, providing significant margin of compliance should segment losses continue. -- The company has well-established and solid relationships with its banks, in our assessment, and has a generally high standing in the credit markets. The company had cash balances of $264 million and marketable securities of $424 million as of June 30, 2012. Cash and investment balances increased 3% to $688 million as of June 30, 2012, as depressed operating cash flow and proceeds from the sale of two small education businesses were offset by share repurchases and investments in marketable securities. We believe the company's marketable securities investments are nonstrategic and consider them a potential source of liquidity, subject to taxable gains. The company has roughly 275,000 shares (roughly $100 million at current market prices) remaining under its September 2011 750,000 share authorization, though it did not announce a target pace of purchases or envisioned completion date. We believe that the company's liquidity will not meaningfully deteriorate. We believe discretionary cash flow will remain depressed at under $100 million in 2012, as a result of the effect of weak education segment operating performance and ongoing cable capital spending requirements. In addition, the dividend, which accounts for about one-third of operating cash flow, increased in February 2012, after more than 15 years of consecutive increases. As of June 30, 2012, Washington Post Co. had full availability of its $450 million revolving credit facilities due June 2015, while its AUS$50 million facility due June 2015, which the company uses to hedge Australian operations, was fully drawn. The U.S. revolving credit provides back-up to the company's commercial paper program. Roughly $110 million in commercial paper was outstanding as of Dec. 31, 2011, which was subsequently repaid with cash early in the first quarter. We believe that the company may borrow to fund seasonal working capital needs in the fourth quarter of 2012. Washington Post Co.'s U.S. revolving credit agreement has one covenant, which requires minimum consolidated shareholders' equity covenant of $1.5 billion. The covenant does not change over the life of facility, but is higher than the $1 billion level under the prior credit agreement, which expired in 2011. As of June 30, 2012, the company had equity of $2.58 billion, providing a 72% margin of compliance. Long-term public debt maturities are minimal until 2019, when the company's $400 million 7.25% senior notes mature. Outlook The negative outlook reflects the potential long-term impact of regulation on the higher education segment's enrollment levels and cash flow, unfavorable structural trends in newspaper publishing, and the possibility of further declines in cable TV cash flow that would otherwise help compensate. We could lower the rating if it becomes apparent that the company's operating performance will continue to deteriorate significantly. This could occur if meaningful enrollment declines continue without the prospect for reversal, or losses resume in the newspaper segment, resulting in further contraction of the EBITDA margin to under 12% and an increase in gross debt leverage above 2.5x. Also, a significant reduction in the company's excess liquidity--which we do not currently expect--resulting from large share repurchases or acquisitions, could pressure the ratings. Given our expectation that operating performance will continue to be under pressure in the second half of 2012 and into 2013, the potential for an outlook revision to stable is currently minimal. Related Criteria And Research -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List Downgraded To From Washington Post Co. Corporate Credit Rating BBB/Negative/A-3 BBB+/Watch Neg/A-2 Senior unsecured BBB BBB+/Watch Neg Commercial paper A-3 A-2/Watch Neg
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DAVOS, Switzerland - Central banks have done their best to rescue the world economy by printing money and politicians must now act fast to enact structural reforms and pro-investment policies to boost growth, central bankers said on Saturday.