Leveraged Loans: S&P cuts rating for Carlyle-backed Extreme Reach

Extreme Reach’s potentially narrow margin of compliance with its leverage covenants in the next year and a half prompted Standard & Poor’s to cut its rating on the ad-services company.

S&P pared its corporate-credit rating on Extreme Reach to B- from B. The outlook is negative.

In addition, the credit-rating company reduced its issue-level rating on Extreme Reach’s first-out – higher priority for payment – revolving facility to BB- from BB. And it cut the first-lien term loan to B+ from BB-.

Extreme Reach, based in Needham, Mass., provides software and services for advertisers, production houses and agencies to manage TV and video ad workflows. Its platform also ensures that ad rights are respected and talent gets paid.

Carlyle Group acquired Extreme Reach in June 2014 via Carlyle U.S. Equity Opportunity Fund.

“The downgrade reflects … the increased risk that the company could violate its leverage covenants if its operating performance remains weak,” S&P Global Ratings Analyst Dylan Singh said in a Sept. 5 report.

Over the next 12 to 18 months, Singh expects “continued weak pricing and delivery volume trends in [Extreme Reach’s] TV ad delivery business.”

Singh pegs the cushion of compliance at 6% to 8% for 2017. This is the percentage of EBITDA above the level that the leverage covenant would require the company to maintain.

After the first quarter of 2018, the company’s leverage requirement steps down 0.25x to 4.25x EBITDA. And the leverage figure must reach 4x in Q3 2018. S&P sees the cushion falling to a range of 4% to 7% in 2018.

To obtain an outlook upgrade to stable, Extreme Reach would need to build the covenant cushion to “comfortably above 15%,” either as operations outperform S&P’s base-case scenario or because the company is able to amend its covenants.

A rating increase would require the company to build a more diverse revenue mix, particularly in its talent and digital segments, Singh wrote.

A spokesman for Carlyle referred questions to the company, which declined comment.

Action Item: Contact S&P Global Ratings Analyst Dylan Singh at dylan.singh@spglobal.com.

Shot of Times Square and its electronic billboards courtesy focusstock/E+/Getty Images