Moody's: Emmis Buyout Would Increase Leverage, Debt
September 2, 2016 at 5:07 AM (PT)
A report by MOODY'S INVESTORS SERVICE on the bid by JEFF SMULYAN to take EMMIS COMMUNICATIONS CORP. THURSDAY (9/1) said that while the offer would increase the company's leverage, it would be "less likely to impact the B3 corporate family rating (CFR) at EMMIS OPERATING COMPANY." The report stressed that whether the deal goes through or not, due to the relatively small size of the company and the likelihood of revenue and EBITDA reductions in either scenario, the company needs to reduce leverage before the next recession to help it withstand further declines in revenue.
MOODY'S noted that the offer would add $70 million of high interest rate second lien debt to EMMIS' balance sheet but that the additional debt would be offset by a required $25 million repayment of first lien debt and an additional repayment of about $35 million of first lien debt upon completion of future asset sales, meaning that the company's total debt would increase by $10 million, and EBITDA would fall "modestly" for the asset sales, resulting in an increase in leverage from 5.8x to 6.6x pro-forma (slightly less if asset sales bring a higher-than-expected price or EMMIS uses an optional $5 million of the proceeds to pay down debt). The deal would also reduce free cash flow due to higher interest rates. Adding the second lien debt "could lead to an increase in the first lien credit facility rating by one notch to B2 from B3," according to MOODY'S, which added that the high leverage would be mitigated somewhat with additional covenant headroom from an amendment to the credit agreement which would go into effect at the time of sale.