Moody's Investors Service has assigned a B3 (Speculative Grade) rating (Free registration required) to Ziff Davis Media Inc.'s (ZD) proposed $205 million of first lien floating rate notes due 2012.
The ratings reflect the heavy burden of ZD's debt and preferred
stock (which is exacerbated by double digit accretion rates), its
high leverage, and heightened debt service pressure which is expected
after its subordinated debt turns cash pay in 2006. In addition,
the rating reflects the relatively poor performance of ZD's established
operations during 2004 and the decline in the circulation of some of its
legacy consumer and computer game related titles. Although a 2002
restructuring removed approximately $150 million in debt from ZD's
balance sheet, its current balance of debt and preferred stock significantly
exceeds levels recorded immediately after the restructuring.
At closing (if successfully concluded), the company expects to record
leverage of over 8 times net debt to reported EBITDA, representing
a fully leveraged profile. ZD's capital structure is predominated
by preferred stock obligations (largely held by Willis Stein) which are
mandatorily redeemable in 2010. Adjusting for $815 million
of mandatorily redeemable preferred stock, leverage exceeds 30 times
reported EBITDA. For assessment purposes, Moody's has
ascribed basket B treatment to ZD's preferred stock, resulting
in 75% debt attribution.
The stable outlook reflects a more normalized operating environment for
the magazine publishing sector, a pick-up in IT budgets,
and increasing market acceptance and usage of Internet related applications,
both of which fell short of expectations a few years ago.
Proceeds from the proposed first lien notes will be largely used to retire
ZD's current $169 million senior secured credit facility.
Post closing, ZD will have no bank facility and will rely upon cash
and cash flow generation to meet its future funding needs.
During 2004, ZD experienced a 5% improvement in revenues
and a 1% improvement in reported EBITDA over the prior year.
This revenue growth resulted largely from the launch of new brands in
ZD's consumer tech group, as well as continued growth in its
enterprise group. Nevertheless, circulation revenues declined
during 2004, impacted, in part, by a reduction in circulation
of ZD's flagship magazine, PC Magazine. In addition,
ZD experienced declines in EBITDA in both its consumer tech group and
its game group during 2004.
In light of the declining circulation of PC Magazine (ZD reduced its rate
base to 700,000 from 1,050,000 in January 2005),
ZD's growth prospects are largely tied to its non-traditional
businesses including Internet and e-commerce related lines and
newer product launches.
The Caa1 senior implied rating reflects Moody's view that the majority
preferred stockholder (Willis Stein) will take no action which will jeopardize
its controlling equity position. Nevertheless, the rating
recognizes that preferred stock interests would receive poor recovery
prospects in a distress scenario. The rating on the proposed first
lien notes are notched up from the senior implied rating, in recognition
of the asset protection afforded to senior secured debt holders,
and their ranking above a very substantial amount of unrated subordinated
debt and preferred stock.
The assignment of a SGL-2 rating to ZD reflects a good liquidity
position characterized by positive free cash flows and cash balances that
are expected to internally fund its business plan over the next twelve
months. However, in 2006, ZD's compounding subordinated
notes turn cash pay (the first payment occurs in 2007), largely
consuming ZD's cash flow and potentially reducing its liquidity
cushion thereafter. The SGL rating acknowledges that the company
will lack a committed liquidity facility should unexpected events occur.
Given the high level of ZD's debt and preferred stock obligations,
ratings improvement is unlikely unless ZD is able to substantially reduce
the level of these obligations to more manageable proportions.
In addition, an improvement in the performance of PC Magazine and
traction in ZD's newer business endeavors could also assist ratings
lift. Ratings pressure could result if the sponsor undertakes initiatives
to monetize its investment in the company or if revenue and earnings growth
from new product launches does not materialize as expected.
Headquartered in New York City, New York, Ziff Davis is a
leading integrated media company focusing on the technology, video
game and consumer lifestyle markets. Total revenues for fiscal
year 2004 were approximately $205 million.
