Rating Action: Moody's assigns Spanish Broadcasting a B3 CFR and a B3 rating to new senior secured notes; outlook stableGlobal Credit Research - 05 Feb 2021New York, February 05, 2021 -- Moody's Investors Service, ("Moody's") assigned Spanish Broadcasting System, Inc. (Spanish Broadcasting) a B3 Corporate Family Rating (CFR), B3-PD Probability of Default Rating (PDR), and a B3 rating to the proposed $310 million senior secured notes due 2026. The outlook is stable.Net proceeds from the transaction and a portion of cash on the balance sheet will be used to repay $250 million of existing outstanding debt and make up to a $68 million cash payment as part of an agreement to extinguish outstanding preferred equity. Spanish Broadcasting will also issue shares of its Class A Common Stock to preferred shareholders as part of the agreement. The transaction extends Spanish Broadcasting's debt maturity, reduces legal and advisory fees, and resolves the event of default under the prior debt indenture and preferred equity agreement, as well as related litigation. As a result, Spanish Broadcasting will be able to focus on operating the business and recovering from the decline in radio advertising revenue due to the impact of the pandemic.The notes and the note guarantees will be secured on a first-priority basis by a security interest in certain existing and future tangible and intangible assets, except for excluded assets. Spanish Broadcasting's subsidiaries based in Puerto Rico will be non-guarantor subsidiaries and accounted for approximately 15% of revenue during the LTM ending Q3 2020.Assignments:..Issuer: Spanish Broadcasting System, Inc.....Senior Secured Regular Bond/Debenture, Assigned B3 (LGD4).... Corporate Family Rating, Assigned B3.... Probability of Default Rating, Assigned B3-PDOutlook Actions:..Issuer: Spanish Broadcasting System, Inc.....Outlook, Changed To Stable From Rating WithdrawnRATINGS RATIONALESpanish Broadcasting's B3 CFR reflects high pro forma leverage (7.8x as of Q3 2020 excluding Moody's standard lease adjustments) as well as Moody's expectation that leverage will increase further in the near term due to the impact of the coronavirus outbreak, but will begin to improve as the economy recovers from the pandemic. The radio industry 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. Secular pressures and the cyclical nature of radio advertising demand have the potential to exert substantial pressure on EBITDA performance in the radio segment over time. Spanish Broadcasting is also small in size with revenue of $128 million LTM as of Q3 2020 and radio operations are located in six markets with concentrated exposure to New York, Los Angeles, Miami, and Puerto Rico.Notwithstanding Spanish Broadcastings small size, the company has developed strong market positions with leading stations in most of the markets that it operates with good EBITDA margins historically. Demographic trends are projected to support audience and advertising demand due to the strong growth of the Hispanic population in the US. Moody's also expects Spanish Broadcasting will continue to seek cost savings in the near term to help offset a portion of the impact from the economic disruption caused by the pandemic. Spanish Broadcasting is projected to benefit from growth in its relatively small TV business with increased carriage agreements, the AIRE radio network, and digital interactive services including the LaMusica radio app and streaming site. Moody's expects the live events business will continue to be disrupted by the pandemic in the near term, but will contribute to growth after the impact of the pandemic abates.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.A governance consideration that Moody's considers in Spanish Broadcasting's credit profile is its high leverage level, but the company is expected to pursue a more moderate financial strategy going forward. Chairman of the Board of Directors, Chief Executive Officer and President, Raúl Alarcón currently owns a 43% economic interest and 85% voting interest in the company, and will remain a controlling shareholder post the transaction. Spanish Broadcasting was previously a publicly listed company but deregistered the company's common stock in July 2020.Moody's expects Spanish Broadcasting will maintain an adequate liquidity position, supported by an undrawn $15 million revolving credit facility (not rated by Moody's). There is approximately $14 million of pro forma cash on the balance sheet as of Q3 2020 and Moody's expects a relatively modest amount of available cash at closing. Free cash flow (FCF) was slightly negative (-$1.9 million YTD as of Q3 2020) and benefited from a $6.5 million Paycheck Protection Program (PPP) loan in April 2020 which is expected to be forgiven pending approval from the Small Business Administration. Moody's expects FCF will turn modestly positive in 2021 and benefit from a recovery in radio advertising revenue as well as from lower legal and advisory fees. Capex is expected to be less than $5 million a year and cash taxes are projected to be in the high single digits going forward as the company will have limited availability to offset future cash taxes with NOLs. Spanish Broadcasting's secured note will not be subject to a financial maintenance covenant. The new revolver is expected to be subject to a maximum net leverage and minimum fixed charge coverage ratio when availability on the revolver is less than $7.5 million.The stable outlook reflects Moody's view that Spanish Broadcasting will continue to experience declines in revenues and EBITDA through Q1 2021 due to the impact of the coronavirus outbreak on the economy and radio advertising revenue, but improve on a year over year (yoy) basis beginning in Q2 2021 as trough quarters from 2020 begin to roll off. The radio industry is expected to start to recover in 2021 and Spanish Broadcasting is projected to benefit from its Spanish language format but the company will see reduced high margin political revenue during a non-election year. Spanish Broadcasting will also face higher expenses in 2021 compared to last year as the benefits of the expected PPP loan forgiveness on EBITDA roll off, but Moody's projects leverage will decline to the low 7x range by the end of 2021 and to the low 6x range by the end of 2022.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings could be downgraded if leverage is projected to be sustained above 7x for an extended period. Continuing negative free cash flow generation or a weakened liquidity position would also result in a downgrade.An upgrade is not expected in the near term due to the impact of the coronavirus and high projected leverage levels. However, ratings could be upgraded if Spanish Broadcasting's leverage decreased well below 5.5x, with positive organic revenue growth and stable EBITDA margins. A free cash flow to debt ratio above 5% and maintenance of a strong liquidity position would also be required.Spanish Broadcasting System, Inc. owns and operates 17 radio stations in addition to TV operations, the AIRE radio network, digital interactive services, and live events focused on Spanish language content. The company's station portfolio is located in 6 markets, with major contributions to revenue from New York, Los Angeles, Miami, and Puerto Rico. Chairman of the Board of Directors, Chief Executive Officer and President, Raúl Alarcón has voting control of the company via a dual-class share structure. Spanish Broadcasting generated approximately $128 million as of LTM Q3 2020.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. 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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.At least one ESG consideration was material to the credit rating action(s) announced and described above.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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