The debt ratings for American Media Operations, owner of the The National Enquirer, Star and Weider publications, have been placed on watch for downgrade by Moody's Investors Service, a move that does not sit well with the company. "We are concerned about the circulation erosion and the overall financial performance of the company," noted John Page, a senior analyst at Moody's.
He pointed out that circulation at some of the flagship titles such as the Enquirer and Star is down 13% and the The Globe is down 16%. Moody's is concerned that "corrective steps being pursued by management may be insufficient to stem the substantial circulation erosion of the tabloid publications and provide for a sustainable revitalization of [American Media's] financial performance, which falls below expectations."
But John Miley, cfo of American Media, disagreed the steps taken are insufficient. "Moody's has failed to recognize the extremely strong cash flow of the company. We repaid $29 million of debt in '04, including a voluntary prepayment of $20 million," he stated, adding that Moody's has also not taken into account the financial strength of equity backers Thomas H. Lee Partners and Evercore Partners. Miley said EBITDA guidance for the most recent earnings is $160 million. This will put total leverage a little over six times.
Also, Miley noted that American Media has demonstrated that circulation for the tabloid publications has stabilized as the company moves into the June 2004 quarter. Star magazine has also been relaunched into a glossy and expanded format, he added. Page agrees that changes have been made, but part of the review process is seeing how successful these changes have been, and these are very recent, he responded.
Moody's notes that to avoid a downgrade, American Media will need to not only demonstrate a significant financial rebound but will continue to shun incremental leveraged-heightening acquisition activity. "I disagree with the general comment that doing extra acquisitions is not the right thing," said Miley, questioning whether Moody's has given American Media credit for how disciplined the company has been. Page agreed that the right acquisition would not be an issue, but he clarified that increasing leverage is the issue. "Leverage has not come down to where we would have expected it to following the Weider acquisition," he underlined.
American Media has a $500 million credit facility led by J.P. Morgan and $550 million of senior subordinated notes. The bank debt is rated Ba3 and the bonds are rated B2. The bank facility includes $437 million of term loans due in 2007. In February, the company received an amendment from the bank group to waive the leverage and coverage covenants through June. According to Miley, American Media is in talks with the banks regarding the covenants. He added though that the credit agreement has a balloon payment due in June 2006, so at some point the whole deal needs to be redone. He added that in the short-term an initial public offering is not likely, but this is certainly a long-term strategic option.