For corporate financiers, what will play out at CanWest Global Communications in coming months should make for far more compelling mystery than the new season of 24.
Moody's finest minds did the credit rating agency equivalent of throwing up their hands over what's coming next at one of the country's largest media companies. They downgraded CanWest debt Thursday to reflect uncertainty over just how the company will pay for the purchase of specialty television holdings from partner Goldman Sachs, a transaction that's scheduled to play out in 2010.
Moody's used to think it had this script figured out: CanWest would sell its controlling interest in Australia's Ten Network to help fund the purchase of Goldman's stake in what was Alliance Atlantis Communications, the specialty channel operator acquired in 2007 for $2.3-billion.
But the value of Ten Network has been cut in half over the last year - shares are down 55 per cent - so selling this asset no longer solves problems. And Moody's said on Thursday: “With advertising revenues contracting as global economic growth slows and with general financial market dislocation, the market value of the Australian properties has declined precipitously and it is unclear if and when value will recover.”
The same long-term concerns are reflected in Moody's view of CanWest's Global television network, which debuts the 7th season of 24 this weekend. Moody's kept a “negative” outlook on the media company's $3.6-billion in debt, saying “The ongoing recession is exacerbating the impact of secular changes to advertising patterns that have likely permanently impaired prospects for Canadian conventional television broadcasters.”
After flagging this idea that CanWest faces “permanently impaired prospects” on core TV assets, Moody's said: “Despite Canwest having recently negotiated amended financial covenants for its revolving credit facility, there is the potential of non-compliance later this year.”
And how will the partnership with Goldman Sachs be unwound? That's where the market is mystified. A major recapitalization may be in the cards, which would be no small feat at a company that wanted to preserve its dual share structure. From a lender's point of view, Moody's said: “The company will not be able to rely solely on asset sales for de-leveraging, and, over time, this may lead to a significant reconfiguration of debt financing.”
Thursday's downgrade featured a shift in what Moody's calls a probability of default rating - a PDR - which is a gauge of the odds on lenders getting their money back. CanWest's PDR went from B1 to B3. The agency's methodology on these PDR ratings explains that this translates into a move from a 15.2 per cent chance of default over the next four years to a 26.4 per cent chance of such an event.
CanWest is scheduled to report quarterly financial results next Wednesday, Jan. 14. The company's shares are trading hands Thursday at 89 cents on the Toronto Stock Exchange, which gives the company a $147-million market capitalization.
