The U.S. broadcast radio sector is still recovering from the pandemic's fallout, more slowly than first expected. Broadcast radio advertising is highly correlated to expectations for consumer spending. Radio advertising is also predominantly local, has short lead times, and is dependent on listening in the car. When the coronavirus pandemic hit in March 2020, radio advertisers were very quick to react and reduce radio adverting spending in response to stay-at-home orders and economic uncertainty. While radio advertising revenue declined relatively in line with our expectations in 2020 (published in October 2020), we expect its recovery will be slower than initially expected and likely extend into 2022. Nevertheless, we don't think the slower recovery will likely affect ratings immediately. Though most radio broadcast companies have negative outlooks, signaling the potential for a downgrade, they've implemented cost-reduction measures and taken other actions to partially offset declines in revenue.

Advertising Revenue Varied But Overall Declined As Expected

Broadcast radio advertising revenue declined relatively in line with our prior expectation of negative 23.5% in 2020.   However, we believe core advertising revenue (excluding political) underperformed our expectations in the fourth quarter of 2020 as the U.S. economic recovery stalled. This slowdown in the recovery was somewhat masked by greater-than-expected political advertising revenue given the U.S. presidential election and the two senate run-off elections in Georgia. That said, radio companies' performance varied depending on their station footprint and the size of their advertising base. Those companies with a greater percentage of stations in large urban markets, such as Entercom, saw a slower recovery in the fourth quarter of 2020 because those markets have been slower to reopen from the pandemic. Companies with more national advertising, predominantly iHeartMedia, performed modestly better than peers than in 2020 because national advertisers weren't hit as hard as local advertisers from the recession.

Slow Revenue Growth Mirrors The Slow Economic Recovery

Broadcast radio advertising's recovery will be slower than expected in 2021 and extend into 2022.  We're lowering our 2021 revenue forecast for broadcast radio revenue growth to 8.7% from our previous forecast in October 2020 of 18% primarily due to the slower-than-expected economic recovery in the U.S. We believe the stalled economic recovery has largely been due to the rise in coronavirus cases in the fourth quarter of 2020, which continued into 2021 during the winter months, as well as the slower-than-expected rollout of the coronavirus vaccine. We believe many local businesses will be hesitant to return to radio advertising, especially those hit hard by the pandemic (such as entertainment and restaurants) until they can gauge the economic recovery better and their markets reopen.

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic.

Table 1

Working From Home Is Transforming Radio Listening

The pandemic will likely lead to a permanent loss in broadcast radio advertising revenue.  We believe the pandemic could permanently change the way people listen to radio, which could harm radio's recovery. Radio listenership spikes during drive time and having a top-rated morning show has historically been key to revenue outperformance in a market. We expect the pandemic to accelerate the trend toward more people working remotely, which could hurt radio's most important listening time. Radio broadcasters will have to adapt their programming to try and capture the ears of people in their home (likely through mobile devices and smart speakers). Advertising rates are typically the highest in the morning and evening drive-time hours while listeners are commuting to and from work.

Despite this, we still expect total radio industry advertising will eventually recover to about 90% of 2019 levels in 2022. Radio still has the greatest reach of any media and is the cheapest on a cost-per-thousand (CPM) basis. CPMs declined sharply after the great recession in 2008-2009, but have held steady over the past few years. We believe radio's high return on investment will remain attractive to many local advertisers and support its recovery.

Companies With Digital Revenues Will Fare Best

Radio companies with greater digital revenue are best positioned to fully recover from the recession.  While digital revenue growth slowed in the second quarter of 2020, it quickly returned to growth in the third quarter and continued to grow in the fourth quarter. As a result, we believe those companies with a greater percentage of digital revenues, namely iHeartMedia and Townsquare Media, are best positioned to recover total revenue to 2019 levels. Most of the remaining rated issuers entered the pandemic with over 85% of revenue from broadcast advertising and, we think they're more exposed to the potential permanent damage to industry advertising.

Table 2

Outlooks Remain Mostly Negative

The prolonged recovery in radio advertising revenue does not immediately impact ratings.  There's no immediate ratings impact from our revised advertising forecast because even if broadcast radio advertising doesn't fully recover, we still expect radio companies to return to full-year 2019 EBITDA levels in 2022. Radio companies took significant cost-reduction actions in 2020, the majority of which we expect will be permanent. In addition, we expect rated radio issuers to have sufficient liquidity to weather the delayed recovery in radio advertising.

We took several negative rating actions at the onset of the pandemic based on our expectation that radio advertising revenue would be materially hurt as a result of the recession and not fully recover. While our revised industry revenue forecast does not immediately affect ratings, a significant portion of our rated universe continues to have a negative outlook due to ongoing risks that the recovery of radio advertising could be slower than we expect or that radio's share of advertising revenue could be more impaired than we currently expect.

Table 3

Related Research

• Reassessing The Pace Of Recovery For U.S. Media, Oct. 20, 2020