-- 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
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.
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
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.
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
-- The company has well-established and solid relationships with its
banks, in our assessment, and has a generally high standing in the credit
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.
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
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