High Leverage Multiple Weighs On Univision

Stacked with leverage and facing tightening covenants, buyout-backed Univision Communications Inc. is being hit with corporate and credit downgrades.

The take-private of Univision in March 2007 was among the more highly levered of peak-period media buyouts; the deal’s $13.7 billion price tag entailed a 13.4x debt-to-EBITDA ratio, according to Reuters Loan Pricing Corp. The buyout group expected soaring growth in the Hispanic population to help sustain predictable long-term growth for the Spanish-language broadcast company.

Then came the economic downturn. Pull-backs in advertising quashed the Spanish-language broadcaster’s plan to whittle down its debt-to-EBITDA multiple to the 9x range by the close of 2008.

For the three months ended Sept. 30, 2008, Univision reported net revenue of $511.3 million, a slight 2.4 percent dip from the $524.0 million generated in the same period in 2007.

With the company taking in less money, ratings agency Moody’s Investors Service predicts that Univision’s debt-to-EBITDA multiple will rise. As a result, Moody’s last month downgraded both its corporate rating and probability of default rating for Univision to B3 from B2, given the ratings agency’s concern that Univision is now more likely to trip a debt-related covenant. Approximately $10.6 billion in debt is affected.

John Puchalla, a senior analyst at Moody’s, said Univision’s total debt-to-EBITDA multiple now stands between 13x and 14x. In October the company borrowed funds from its $1.5 billion draw term-loan to pay off $250 million in senior notes that were due that month, according to a regulatory filing.

Meanwhile, the covenant cushion pertaining to Univision’s senior secured first-lien debt is shrinking. As of last month, the company was required to maintain a senior debt-to-EBITDA multiple of no more than 11.75x, a substantial step down from last September’s 13.25x requirement. By December 2009, the requirement will tick down another turn to 10.75x, which is roughly equal to Univision’s current senior debt-to-EBITDA multiple. “If they kept leverage flat, they could maintain compliance with the covenant, although the cushion would be a lot tighter,” Puchalla said.

In an email, a Univision spokesperson told Buyouts that the company “has more than ample liquidity to operate the business in the current environment, and has sufficient cash on hand to meet all obligations and debt maturities including repayment of the [$500 million] asset sale bridge due in March 2009. There are no other debt maturities until the later part of 2011.”

But the need to maintain and reduce leverage levels puts greater pressure on Univision to grow its revenue, which totaled $1.5 billion for the nine months ended Sept. 30, 2008, virtually flat with its performance in the same period a year ago.

Univision was acquired nearly two years ago by Madison Dearborn Partners, Providence Equity Partners, Saban Capital Group Inc., Thomas H. Lee Partners and TPG, after the group struck a $36.25 per-share deal to take it private in June 2006.

Among Univision’s strengths is its market position. For the three months ended Sept. 30, the company was ranked as the third most popular primetime broadcast network among 18- to 34-year-olds in the United States, according to Nielsen’s National Television Index. NBC was the most popular among that demographic, followed by Fox. “The primary credit issue at this point is liquidity,” Puchalla said. “If they can get through the downturn, they should be able to realize the benefits of their strong business characteristics over the long term.”

The difficult economy has a number of other media concerns struggling as well. Last month, The Tribune Co.—strapped with about $13 billion in debt—filed for Chapter 11 bankruptcy protection about one year after it was acquired by real estate investor Sam Zell. Newspapers owned by Tribune include The Los Angeles Times, The Chicago Tribune and The Orlando Sentinel.

Ripplewood Holdings-owned Reader’s Digest Association, meanwhile, saw its corporate ratings downgraded by both Moody’s and Standard & Poor’s last month. Moody’s cited consumer spending and high leverage when it lowered the company’s rating to B3 from B2. S&P called attention to the highly competitive publishing market and concerns regarding management’s ability to stem business declines when it lowered Reader’s Digests’s rating to B- from B.