S&P cuts Source Media <SRCM.O> ratings to CCC-minus
NEW YORK, Dec 7 - Standard & Poor's today lowered its ratings on Source Media Inc. (see list below).
The current outlook is negative.
The downgrades are based on Source Media's dwindling liquidity and concern about the company's ability to make the May 2001 interest payment on its senior secured notes, continuing EBITDA and discretionary cash flow losses, as well as extremely limited near-term prospects for meaningful cash flow improvement.
The ratings reflect the weak operations of Source Media's voice and Internet information services business. Ratings further reflect Source Media's very high financial risk from a small revenue base, negative EBITDA, heavy levels of debt and debt-like preferred securities, and an absence of liquidity and flexibility.
Balancing these considerations are Source Media's position as a provider of voice information and advertising services to major Yellow Page publishers and the longer-term potential of an interactive television business held through a 50% joint venture equity interest.
Source Media's primary revenue driver is a voice information business, which sells advertising to sponsors of interactive messages distributed through client Yellow Page directories, newspapers, and Internet web sites.
Sales in the print-related information business have been declining, though some of this has been from the termination of less profitable accounts, which should help profitability somewhat. Internet advertising sales increases during the past year have only partially offset declining print sales.
Source Media transferred its interactive TV business to a 50/50 venture with Insight Communications Co., Inc. This developmental business, which provides interactive content to cable television operators, generates no meaningful revenue and produces EBITDA losses.
The interactive TV service suffers from very limited distribution and will require considerable increases in cable system penetration before subscriber fees and advertising revenue reverse ongoing losses. Financially much stronger Gemstar-TV Guide International Inc. is a substantial competitor in this business.
Revenue for the first nine months of 2000 fell 7% from the same period in 1999 due to decreased advertising sales, offset by increases in streaming audio sales and Internet advertising. Source Media's EBITDA for the latest 12 months ended Sept. 30, 2000, was negative $5.6 million, representing a narrower loss than during the same period in the previous year, largely due to the transfer of the interactive TV business, but also due to reduced product costs from discontinued sales and a reduction in customer advertising make-goods.
The cash balance for Sept. 30, 2000, prior to a $5.4 million interest payment made on Nov. 1, 2000, was about $13.2 million. The company also has 886,000 shares of Liberate Technologies common stock, currently valued at about $12 million, held as securities available for sale.
However, Standard & Poor's believes Source Media may be unwilling to sell these securities given their 86% decline in value since the company received them in March 2000.
OUTLOOK: NEGATIVE.
Unless Source Media shows progress in improving operations and cash flow and secures additional financing to help meet interest payments and improve liquidity, the ratings may be lowered, Standard & Poor's said.
RATINGS LOWERED
Ratings
Source Media Inc. To From
Corporate credit rating CCC- CCC
Senior secured debt CCC- CCC
Preferred stock rating C CC
11:13 12-07-00 |
