Salem Media Group, Inc. -- Moody's affirms Salem Media's Caa1 CFR; outlook changed to stable

Rating Action: Moody's affirms Salem Media's Caa1 CFR; outlook changed to stableGlobal Credit Research - 26 Mar 2021New York, March 26, 2021 -- Moody's Investors Service ("Moody's") affirmed Salem Media Group, Inc.'s (Salem) Caa1 Corporate Family Rating (CFR) and Caa1 senior secured note rating. The outlook was changed to stable from negative.Salem's liquidity profile has improved with better free cash flow generation in 2020 and the receipt of proceeds from the US government Paycheck Protection Plan (PPP) loans. Additionally, while the coronavirus pandemic has had a substantial negative impact on the radio industry, Salem has benefited from more stable digital media revenue and national block programing as well as growth in digital services (Salem Surround and SalemNOW) in 2020.Moody's changed Salem's Speculative Grade Liquidity (SGL) rating to SGL-3 from SGL-4 as a result of the improved liquidity position.A summary of Moody's actions are as follows:Affirmations:..Issuer: Salem Media Group, Inc..... Corporate Family Rating, Affirmed Caa1.... Probability of Default Rating, Affirmed Caa1-PD....Senior Secured Regular Bond/Debenture, Affirmed Caa1 (LGD4)Upgrades:..Issuer: Salem Media Group, Inc..... Speculative Grade Liquidity Rating, Upgraded to SGL-3 from SGL-4Outlook Actions:..Issuer: Salem Media Group, Inc.....Outlook, Changed To Stable From NegativeRATINGS RATIONALESalem's Caa1 CFR reflects very high leverage (8.7x as of Q4 2020 excluding Moody's standard lease adjustments) which Moody's expects to remain elevated throughout 2021 despite the possibility of debt repayment from cash on the balance sheet. Salem is also being negatively affected by the shift of advertising dollars to digital mobile and social media as well as heightened competition for listeners from a number of digital music providers. With the vast majority of its signals on the less attractive AM band, Salem is particularly exposed to secular pressures and the cyclical nature of radio advertising demand which will continue to exert pressure on EBITDA performance over time. The radio industry is expected to recover as the vaccine continues to be distributed and health restrictions ease, but it may take time for radio advertising rates to recover to pre-pandemic levels, which we expect will be dependent on the pace of US economic recovery. Salem's scale is also relatively small with revenue of $236 million in 2020, with geographic concentration in two markets (Los Angeles and Dallas) which accounted for approximately 20% of net broadcasting revenue last year.Despite the constraints on the credit profile, Salem has a leading market position in Christian teaching and talk format. Its national block programming revenue is less reliant on advertising dollars recurring, and therefore more stable than other revenue streams of the company. Moody's also projects Salem will continue to benefit from strength in digital revenue over time which will benefit from new digital offerings. The company has a relatively broad footprint (in 35 markets), with a station portfolio that is largely in the top 25 markets.Salem's SGL-3 rating reflects access to a $30 million ABL facility due March 2024 ($5 million drawn) and $6 million of cash on the balance sheet as of Q4 2020. Salem will also benefit from up to $11.2 million in potential PPP loans ($8.6 million received in January 2021) which will increase Salem's cash balance further in Q1 2021. The PPP loans have the potential to be forgiven if the proceeds are used for eligible purposes and after approval by the Small Business Administration. If the PPP loans are not forgiven and remain outstanding as debt, it would add about a 1/2 turn to existing leverage levels. Free cash flow was $18 million in 2020 which benefited from working capital efficiency, the suspension of distributions, and reduced capex of $4.6 million. Moody's expects free cash flow will be slightly negative in 2021 due in part to an increase in capex to approximately $11.6 million. The ABL facility is subject to a fixed charge coverage ratio of 1x when availability is less than the greater of 15% of the maximum revolver amount and $4.5 million. Moody's expects Salem will remain in compliance with the fixed charge covenant going forward.Salem's debt structure includes a $30 million ABL facility (not rated) as well as a senior secured note rated Caa1 which is in line with the Caa1 CFR as it represents the vast majority of outstanding debt.The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Moody's analysis has considered the effect on the performance of advertising revenue from the current weak US economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.Salem is exposed to governance risk, with a financial policy that tolerates high leverage and a moderately aggressive growth strategy. While free cash flow and asset sale proceeds have been used to repay debt over the past several years, capital expenditures have historically been high with a propensity for new ventures and acquisitions. The company suspended its quarterly dividend in Q2 2020 to increase financial flexibility and Moody's projects Salem will be focused on debt reduction going forward. Salem has also completed a number of related party transactions with management and family members who own the majority of the economic interest and have voting control of the company.RATING OUTLOOKThe stable outlook reflects Moody's view that Salem's EBITDA will be relatively flat as the radio industry begins to recover from the impact of the pandemic, but the gains are largely offset by reduced political related revenues in a non-election year. Moody's projects leverage will decline modestly to below 8.5x in 2021 and below 7x by the end of 2022 as the radio industry continues to recover from the pandemic, higher political related revenue, as well as debt repayment. Key assumptions include our expectation that the radio industry is projected to start to recover in 2021, but radio advertising rates may not reach pre-pandemic levels in the near term. We also expect Salem's digital services to be a source of continued growth and investment.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings could be upgraded if debt-to-EBITDA is sustained comfortably below 6.5x (excluding Moody's lease adjustments) with stable organic revenue and EBITDA margins. A free cash flow-to-debt percentage in the mid-single digit range would also be required as well as maintenance of an adequate liquidity profile.Ratings could be downgraded if debt-to-EBITDA was expected to remain above 8x (excluding Moody's lease adjustments) for an extended period of time, EBITDA minus capex interest coverage ratio declined to less than 1x, or if free cash flow was continuously negative. A deterioration of the company's liquidity profile or elevated concern about its ability to service its debt could also result in a downgrade.Salem Media Group, Inc., formed in 1986 and headquartered in Camarillo, CA, is a religious programming and conservative talk radio broadcaster with integrated business operations including digital media and publishing. Salem owns and operates 99 local radio stations (33 FM, 66 AM) in 35 markets. The digital media business provides digital services including audio and video web streaming of Christian and conservative themed content as well as digital marketing services. Salem's publishing business largely publishes books by conservative authors and offers a self-publishing service. Edward G. Atsinger III (CEO), Stuart Epperson (Chairman, and brother-in-law of CEO), Edward C. Atsinger (son of the CEO), Nancy A. Epperson (Chairman's spouse), and their trusts own a majority of the economic interest in the company and have voting control through a dual class share structure with the remaining shares being widely held. Revenue for the last twelve months ending Q4 2020 was $236 million. Salem is a publicly traded company listed on the NASDAQ Global Market (SALM).The principal methodology used in these ratings was Media Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1077538. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Scott Van den Bosch VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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