-- On Nov. 13, 2012, U.S.-based Penton Business Media Holdings acquired Farm Progress, a leading agriculture-focused publisher and trade show operator, from Fairfax Media Ltd. for $79.9 million before certain adjustments.
-- We are increasing our estimate of enterprise value at default, reflecting better operating performance and the Farm Progress acquisition.
-- We are affirming our 'B-' corporate credit rating on Penton. At the same time, we are revising our recovery rating on the senior secured debt to '3' from '4'. The issue-level rating on this debt is affirmed at 'B-'.
-- The stable outlook reflects our expectation that the company will continue to generate discretionary cash flow and EBITDA coverage of interest expense will continue to improve, and that liquidity and compliance with financial covenants will remain adequate over the near term. Rating Action On Nov. 29, 2012, Standard & Poor's Ratings Services affirmed its 'B-' corporate credit rating on New York City-based business-to-business trade show operator and publisher Penton Business Media Holdings Inc. The outlook is stable. At the same time, we revised the recovery rating on the company's senior secured debt to '3', indicating our expectation for meaningful (50%-70%) recovery prospects in the event of a default, from '4'. We affirmed the 'B-' issue-level rating on this debt. Rationale The rating on Penton reflects Standard & Poor's expectation that the company's leverage will remain high over the intermediate term. The rating also incorporates our view of refinancing risk in relation to the company's August 2014 debt maturity, notwithstanding our expectation that the company's liquidity will be "adequate" over the near term and that Penton will continue to generate discretionary cash flow. These factors underpin our view of Penton's financial risk as "highly leveraged" based on our criteria. We assess Penton's business risk as "weak" given our expectation that the company will remain susceptible to cyclical advertising demand and that unfavorable secular trends will continue to pressure the publishing business. On Nov. 13, 2012, Penton acquired Farm Progress from Fairfax Media. Pro forma for the acquisition, lease-adjusted leverage is 7.6x, or 7.2x when assuming synergies. The acquisition expands Penton's presence in the agriculture industry and adds large exhibition shows to the company's portfolio. The acquisition was funded with the revolving credit facility and cash on hand. Penton is one of the largest independent business-to-business media companies in the U.S. Trade publishing, which accounts for about half of total revenue, is sensitive to cyclical advertising demand in certain of the company's end markets-such as restaurants, aviation, and financial services-and secular trends in others such as manufacturing. Trade publications rely exclusively on advertising because they do not charge subscription fees. Trade publishing is facing broadly unfavorable secular trends. Print advertising is exhibiting a long-term decline in light of competition from Internet-based media, which have low barriers to entry. The company has closed some unprofitable magazines and cut significant costs from the publishing business, but additional margin improvement in this area may be difficult to accomplish. The company's trade show portfolio includes leading shows such as ExpoEast, ExpoWest, and WasteExpo, along with some smaller shows. The Farm Progress acquisition adds leading agriculture trade shows to Penton's portfolio. The trade show segment is vulnerable to economic cyclicality, although larger trade shows tend to be able to absorb declines better than smaller shows. We view Penton's management and governance to be "fair." Under our base case scenario for 2013, we expect revenue to grow at a low- to mid-teens percentage rate primarily due to the Farm Progress acquisition. We believe that 2013 organic revenue will remain relatively flat, with growth from trade shows and digital offsetting long-term declines in the publishing segment. We expect EBITDA to grow over 20% in 2013 due to the acquisition and a modest increase in profitability at the company's existing businesses. We expect the EBITDA margin to be in the high-20% range for 2013. Under these assumptions, we expect debt to EBITDA, adjusted for operating leases and pension obligations, to fall to under 7x by the end of 2013. As of Sept. 30, 2012, lease-adjusted debt to EBITDA was high at 8.2x, down from 8.8x at Sept. 30, 2011-higher than the 5.0x or more level that Standard & Poor's associates with a highly leveraged financial profile. Pro forma for the Farm Progress acquisition, leverage was 7.2x assuming synergies. We expect pro forma leverage to fall to around 7x by the end of 2012. For the quarter ended Sept. 30, 2012, revenue fell 1% and EBITDA increased more than 10%. A decline in print revenue offset gains in the trade show and digital segments. The improvement in the EBITDA margin was due to the closure of certain lower margin properties and growth in the higher margin exhibition segment. We include restructuring-related costs and management fees in our calculation of EBITDA. The company's EBITDA margin for the 12 months ended Sept. 30, 2012, was 25.3%, up from 23.1% for the same period in 2011. Unadjusted EBITDA coverage of cash interest was 2.5x for the 12 months ended Sept. 30, 2012, an improvement from 1.6x in same the period a year earlier. Pro forma for the Farm Progress acquisition, cash interest coverage was over 3x. We expect this metric to be in the high-3x area at the end of 2013. Cash interest expense has fallen significantly over the past two years due to the expiration of unfavorable interest rate swap agreements. The company converted roughly 52% of EBITDA into discretionary cash flow for the 12 months ended Sept. 30, 2012, an increase from 15% in the same period a year earlier. We expect the company will convert over 60% of EBITDA to discretionary cash flow in 2013, due to our expectation of EBITDA growth with a minimal increase in capital spending. Liquidity Penton has "adequate" liquidity to cover its operating needs over the next 12 to 18 months, as per our criteria. This assessment incorporates the following expectations and assumptions:
-- We expect the company's sources of liquidity to cover its uses by at least 1.2x over the next 12 to 18 months.
-- We expect net sources to be positive over the next 12 months, even with a 15% to 20% drop in EBITDA.
-- We expect the company to maintain covenant compliance in the event of a 15% decrease in EBITDA.
-- Because of the company's satisfactory margin of compliance with its financial covenants, and our expectation that the company will generate solid discretionary cash flow this year, we believe it could absorb a high-impact, low-probability event without the need for refinancing. As of Sept. 30, 2012, Penton's liquidity sources included cash balances of $37.0 million and full borrowing availability on the $42.7 million revolving credit facility due 2014. At the end of 2012, we believe Penton will have total liquidity of $25 million or more, following payments for the Farm Progress acquisition. We expect the company to generate $50 million of discretionary cash flow for the full year 2012 and $55 million to $60 million in 2013. Uses of liquidity include modest capital expenditures. The company also has annual debt amortization payments of $6.4 million. Penton's term loan and revolving credit facility mature in August 2014. The amended credit agreement contains a minimum liquidity requirement and a minimum EBITDA requirement. The minimum EBITDA test was the tightest covenant as of Sept. 30, 2012, with a 40% cushion. This covenant became effective on March 31, 2011, and progressively steps up each quarter. We estimate that the company's margin of compliance with its minimum EBITDA requirement will be adequate over the near term. The company's credit agreement also has a minimum liquidity covenant, which stipulates that the company's cash balance and availability under its revolving credit facility must be greater than $15 million. The covenant allows for the cash balance to drop to $12.5 million for two months during any 12-month period and $10 million for one month during the same 12-month period. Recovery analysis For the complete recovery analysis, please see our recovery report on Penton Business Media Holdings, Inc., to be published on RatingsDirect following this release. Outlook The outlook is stable, reflecting our expectation that discretionary cash flow and EBITDA coverage of interest expense will continue to improve, and that liquidity and compliance with financial covenants will remain adequate over the near term. We could raise the rating if the company makes significant progress toward addressing its 2014 maturities. An upgrade would likely also entail the company showing consistent organic revenue and EBITDA growth, with a stable or improving EBITDA margin. Although less likely over the near term, we could lower the rating if EBITDA trends reverse, causing discretionary cash flow to decline dramatically. Factors that could contribute to such a scenario include a resumption of economic weakness and accelerated declines in the business-to-business media segment, especially the trade publishing business. Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List Ratings Affirmed Penton Business Media Holdings Inc. Penton Media Inc. Penton Business Media Inc. Corporate Credit Rating B-/Stable/-- Ratings Affirmed/Recovery Change Penton Business Media Inc. Penton Media Inc.
TO FROM Senior Secured B- B- Recovery Rating 3 4 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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