Rating Action Overview

• U.S.-based television broadcaster CMG Media Corp.'s S&P Global Ratings-adjusted gross leverage could remain above our 6.5x downside threshold, depending on the outcome of pending station acquisitions from TEGNA, and the potential use of its sizable cash balance if the acquisitions do not occur.
• We also expect weaker operating performance in 2023 due to lower core advertising revenue amid an expected recession, slower retransmission revenue growth, and asset sales completed in 2022.
• As a result, we revised our outlook on CMG to negative from stable and affirmed the 'B' issuer credit rating on the company.
• The negative outlook reflects the uncertainty around the outcome of CMG's pending station acquisitions from TEGNA, which remains subject to regulatory approval, and the potential use of its sizable cash balance if the transactions do not occur.

Rating Action Rationale

CMG's acquisitions create uncertainty in the business. It is uncertain how CMG will choose to fund its pending acquisition of stations from TEGNA, or if the deal is not completed, how it would decide to allocate its current sizable cash balance. We expect CMG to end 2022 with about $820 million-$830 million in cash (primarily due to TV station divestitures in 2022), and for it to generate about $20 million of reported free cash flow in 2023.

CMG's pending acquisition of stations from TEGNA is dependent on Standard General's pending acquisition of TEGNA. This includes CMG acquiring four small-market stations from Standard General and transferring its Boston TV station to Standard General. CMG will then receive $450 million of series B cumulative perpetual preferred shares in the new TEGNA in partial consideration for its Boston station. After the close of those two transactions and the TEGNA take-private transaction, CMG would acquire TEGNA's Texas TV station portfolio, which includes four stations across Austin, Dallas, and Houston, for $914 million.

We believe it would be a deleveraging event if the company uses the majority of its current excess cash to complete the transactions. However, if the company chooses not to use the majority of its cash and instead raises significant incremental debt to fund its acquisitions, this would result in a significant increase in leverage. If the transactions are not completed, and the company does not use its excess cash to reduce debt but instead uses it for shareholder returns, we believe it unlikely performance alone would be enough for the company to deleverage back below 6.5x, the threshold for the current 'B' rating. We note the company previously paid $322 million of dividends in 2021 and $162 million in 2020.

We expect CMG's S&P Global Ratings-adjusted gross leverage (absent the TEGNA acquisitions) to remain elevated above 6.5x over the next 12 months.  We expect S&P Global Ratings-adjusted gross leverage of just under 8x in 2023, compared with our previous expectation for it to remain below 6.5x. We expect lower EBITDA from our past expectations due to lower core advertising and retransmission revenue from recent asset sales and unfavorable macroeconomic conditions. We expect the company's net retransmission revenue to be down in 2023 due to increased subscriber churn, the ongoing blackout with Dish Network, and ongoing pressure on reverse retransmission rates from affiliate renewals. We also expect the company's free operating cash flow (FOCF) to debt coverage to decline to 1%-3% in 2023, due to the lack of high-margin political revenue and an increased interest burden from rising rates, but we expect FOCF to debt coverage to return close to 7%-9% in 2024, primarily from an expected $200 million in political revenue.

Local advertising (excluding political) has been more resilient than expected, but we still expect it to decline in 2023 due to weakening macroeconomic conditions. Local advertising has so far held up relatively well as consumers continue to spend while national advertising has already been soft for a few quarters as companies reduce spending on brand building in anticipation of a pullback in consumer spending. Despite this, visibility into local television advertising is limited as advertisers have been making shorter-term commitments. S&P Global's economists expect a very shallow recession for the U.S. economy in 2023, which we believe will cause local television advertising to decline in the low-single-digit percent area in 2023.

Outlook

The negative outlook reflects the uncertainty about the outcome of CMG's pending station acquisitions from TEGNA, which remains subject to regulatory approval, and the potential use of its sizable cash balance if the transactions do not occur.

Downside scenario

We could lower the rating if CMG's S&P Global Ratings-adjusted gross leverage remained above 6.5x and its FOCF to debt declined below 5%. This could be caused by:

• CMG financing its acquisition of TEGNA's Texas TV stations with a large amount of incremental debt,
• The acquisitions not closing and the company using its sizable cash balance for dividends, or
• Macroeconomic pressures leading to significant advertising declines that limit its ability to deleverage.

Upside scenario

We could revise the outlook to stable if we expected S&P Global Ratings-adjusted gross leverage to decline below 6.5x while FOCF to debt remained above 5% (over a political cycle). This could occur if:

• The company funded its acquisition of TEGNA's stations primarily with cash, and the station generated sufficient incremental EBITDA that led to deleveraging; or
• The deal was not completed and the company used a sizable portion of its cash balance to repay debt.

Company Description

CMG Media Corp. is a TV and radio broadcaster operating in mainly large to midsize U.S. markets. It owns or operates 13 television stations in 9 markets (reaching 11% of U.S. households) and 54 radio stations across 11 markets. The company is majority owned and controlled by Apollo Global Management, with the Cox family and previous NBI equity holders maintaining a minority stake.

Our Base-Case Scenario

• Our base case forecast does not include the pending TEGNA acquisitions, but is pro forma recent asset sales by the company.
• U.S. GDP increases 0.7% in 2023 and increases 1.2% in 2024. The U.S. enters a very shallow recession in 2023 because inflation remains high from continued supply chain disruptions, increased risk for further interest rates hikes by the Federal Reserve, and declining household purchasing power. Core advertising revenue (excluding political) is highly correlated to GDP growth since expectations for consumer spending drive advertising budgets.
• Total revenue pro forma recent asset sales declines 12%-14% in 2023, primarily due to lower political advertising revenue in an odd year. We expect revenue will increase 20%-22% in 2024, primarily due to higher political advertising revenue associated with the U.S. presidential election.
• Retransmission revenue increases about 1% in 2023 and 5% in 2024, primarily driven by higher prices associated with expected contract renewals and annual price escalators, largely offset by subscriber churn. About one-third of CMG's subscriber base is up for renewal in each of the next three years. Our industry forecast assumes total pay-TV subscribers (including both legacy and virtual pay-TV subscribers) will decline about 7% over the next two years (an acceleration from about 6% in 2022) as consumers continue moving to streaming video alternatives.
• Core advertising revenue declines 4%-6% in 2023 due to macroeconomic pressure and increases 2%-4% in 2024 as economic conditions improve.
• Political advertising revenue of about $13 million in 2023--an odd year--and about $200 million in 2024--an even U.S. presidential year.
• Digital advertising revenue increases 5%-7% in 2023, improving to 9%-11% as macreoncominc conditions improve toward the end of 2023 and into 2024.
• Expenses decline 1%-3% in 2023 due to recent cost reductions enacted by the company, including reductions in headcount and corporate overhead. Expenses increase 3%-5% in 2023 due to increased reverse retransmission costs and increased investment spending to support revenue growth.
• Last eight quarters S&P Global Ratings-adjusted EBITDA margin remains in the low 30% area in 2023 and 2024, in line with 2022, because wage inflation and other cost increases are mostly offset by management's cost-reduction efforts.
• Capital expenditures of $15 million-$25 million in 2023 in 2024.
• Our base case forecast does not include any potential acquisitions, share repurchases, or dividends.

Liquidity

CMG has adequate liquidity to support its operations over the next 12 months based on the following estimates:

• Sources should exceed uses by well over 2x in the next 12 months.
• Sources would continue to exceed uses even if forecast EBITDA declines 15%.
• The company has sufficient covenant headroom for forecast EBITDA to decline by 15% without it breaching its covenants.
• Given the company's current elevated cash balances and longer dated maturities we view it could likely absorb a material adverse event without refinancing, but we believe its ability to do so would diminish as its cash balances decline.
• We do not view the company has a high standing in the credit markets as its senior unsecured notes are currently trading at about a 25-cent discount with a yield close to 17%.
• We do not view the company has prudent risk management given it is financial sponsor ownership.

Principal liquidity sources:

• Estimated $820 million-$830 million of cash on the balance sheet as of Dec. 31, 2022;
• Full availability under the company's $325 million revolving credit facility; and
• $40 million-$50 million of cash funds from operations over the next 12 months.

Principal liquidity uses:

• Mandatory debt amortization of about $23 million over the next 12 months,
• Working capital requirements of $5 million-$10 million over the next 12 months, and
• Capital expenditure of about $15 million-$25 million over the next 12 months.

Covenants

The senior secured revolver has a 6.2x first-lien net leverage covenant that only applies if CMG draws on more than 35% of the revolver's commitment. We do not expect the company to trigger its covenant over the next 12 months and believe it would have a sufficient EBITDA cushion to maintain full access to its revolver even if the covenant was in effect.

Issue Ratings - Recovery Analysis

Key analytical factors

• The company's capital structure includes a $200 million receivable securitization facility (not rated) due 2024; $325 million senior secured first-lien revolving credit facility expiring in 2024; $2.1 billion senior secured first-lien term loan maturing in 2026; $1.015 billion senior unsecured notes due in 2027; and a $5.5 million WJAX–TV senior unsecured loan due 2024 (not rated).
• The senior secured debt is guaranteed by CMG Media Corp. and its direct and indirect wholly owned subsidiaries (with certain exceptions). It is secured on a first-lien basis by substantially all of CMG's assets and those of its guarantors (with certain exceptions, including U.S. Federal Communications Commission licenses and certain assets obtained through capital leases and other financing obligations).
• We have lowered our gross recovery valuation to $1.92 billion from $2.15 billion due to recent asset sales by the company, which caused us to revise our emergence EBITDA assumption.

Simulated default assumptions

• Our simulated default scenario contemplates a default occurring in 2026 due to a combination of factors: increased competition from alternative media, a prolonged decline in core advertising revenue because of economic weakness, a failure to generate retransmission revenue commensurate with its local market and relevant television networks, and pressure from affiliated networks to remit a significant portion of its retransmission fees.
• Other default assumptions include an 85% draw on the revolving credit facility, a 60% draw on its receivables securitization facility, the spread on the revolving credit facility rising to 5% as covenant amendments are obtained, and all debt includes six months of prepetition interest.
• We value the company on a going-concern basis using a 6.5x multiple of our projected emergence EBITDA, which in line with the multiples we use for the similar size television broadcasters that we rate.

Simplified waterfall

• EBITDA at emergence: $296 million
• EBITDA multiple: 6.5x
• Gross recovery value: $1.92 billion
• Net enterprise value (after 5% administrative costs): $1.83 billion
• Estimated priority claims (receivables securitization facility): $121.5 million
• Value available to senior secured debt: $1.70 billion
• Estimated senior secured debt: $2.39 billion
• --Recovery expectations: 70%-90% (rounded estimate: 70%)
• Value available to senior unsecured debt: $0
• Estimated senior unsecured debt: $1.06 billion
• --Recovery expectations: 0%-10% (rounded estimate: 0%)

Ratings Score Snapshot

ESG credit indicators: E-2, S-2, G-3

Related Criteria

• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• General Criteria: Group Rating Methodology, July 1, 2019
• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Ratings List