Fitch Downgrades Belo to 'BB'

Sun. November 09, 2008; Posted: 10:42 PM

--Long-term IDR to 'BB' from 'BB+';

--Senior unsecured debt to 'BB' from 'BB+';

--Bank facility to 'BB' from 'BB+'.

The Rating Outlook is Negative.

The rating action reflects continued pressure in local advertising revenue that will likely remain through 2009, making it unlikely for the company to de-lever to the 4 times (x) debt-to-EBITDA range or below over the time frame Fitch previously expected. Given existing industry trends, Fitch believes the company's leverage ratio could potentially breach the 5x covenant in the bank facility over the next four quarters. (As defined in the company's credit agreement leverage and interest coverage were 4.4x and 3.0x, respectively.) Fitch is cautious regarding negotiations with banks in this environment and as such Fitch is cognizant that it is possible a covenant breach could result in a request for subsidiary guarantees (or material pricing increases) on the bank debt as part of a covenant amendment. While the indenture governing Belo's outstanding bonds has a Limitation on Mortgages covenant, Fitch does not believe it restricts subsidiaries from guaranteeing unsecured debt. Such a scenario could result in notching between the bank debt and bonds.

The ability to secure retransmission fees from the major cable providers that come up for renewal over the next two years could contribute to stabilizing the Outlook, as would material reduction or suspension of the dividend. Management's execution and stated focus on cost reductions and its exclusive focus on debt repayment is incorporated into the rating. Excluding hurricane-related one-time costs, expenses were down 3.4 percent in the quarter and headcount was approximately 5 percent lower. As such, Belo has still been able to generate strong margins despite a very difficult macro-economic environment. The company also reduced $42 million in debt in the quarter (bringing total debt to $1.14 billion) and stated its intention to continue to dedicate free cashflow toward debt pay-down for the foreseeable future.

Given the redemption of the $350 million senior notes this week, Belo does not have any material maturities until its bank facility comes due June 2011. Fitch estimates the company currently has approximately $440 million drawn on its $600 million facility (after taking into account the $350 million redemption). In addition, the company had $6 million of cash at Sept. 30. While core liquidity is materially lower than before the redemption of the senior notes, Fitch believes the company's liquidity is sufficient as there are no material working capital uses and Fitch does not anticipate the company will burn cash in 2009.

The ratings continue to be supported by the company's strong local presence in the top-50 U.S. markets and top network affiliations. Fitch continues to believe that there is an overcapacity of premium-priced media outlets in most mid-to-major markets, and that ad dollars will continue to flow out of these outlets and toward emerging media over the next several years. In Fitch's view the lower rated stations that are unable to sufficiently aggregate the local market audiences will bear a disproportionate share of the outflow. Belo maintains strong network affiliations and has a track record of making investments in its news infrastructure, which has positioned it to have either the No.1 or No.2 station in most of its markets. As such, Fitch would also expect the company to compete more effectively with newspapers and radio for local ad dollars over the intermediate term.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, fitchratings.com.

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