Fitch: Radio Broadcasting Outlook Negative in 2007.

NEW YORK -- Fitch continues to have a negative outlook for the radio broadcasting sector. This is generally based on the secular challenges the industry is experiencing coupled with the event risk related to revisions in fiscal policies and capital structures. As the industry continues to be affected by emerging listening technologies and alternative advertising mediums for local advertisers, various industry players have experienced minimal growth and depressed stock prices. As a result, some management teams within the industry have resorted to radical changes in fiscal policies resulting in material leveraging transactions and greater risk for bond holders.

Significant changes in fiscal policies and portfolio composition were the norm in 2006 as Clear Channel, Univision and Emmis all announced they were considering strategic alternatives, and Disney, CBS and Clear Channel all announced or executed plans to sell radio assets. Fitch expects a large portion of any sale proceeds to go towards shareholder-friendly initiatives and not towards debt reduction or reinvestments into the business. Related to the Disney divestitures, Citadel (the buyer) recently renegotiated the terms of its acquisition based on worse-than expected operating performance. Fitch believes that all of these actions are generally the result of secular issues facing the broader traditional media sector.

From an operating perspective, Fitch still expects radio broadcasters to continue to capture meaningful portions of local advertisers' budgets; however, nothing more than low, single-digit revenue growth should generally be expected over the next few years as the industry will continue to be influenced by trends in listenership (emerging mediums), advertising inventory and pricing.

Listenership has been steadily declining and Fitch believes continued downward pressure on audience ratings should be expected over the next few years. The majority of Arbitron Inc.'s (Arbitron) ratings for the 25-54 age demographic has declined over the past five years due to additional media alternatives for consumers' time and poor listener experience due to commercial clutter. Drilling down into genres shows that stations with radio formats related to urban and Spanish music experienced robust cumulative growth over the past five years (20% and 58%, respectively for the 25-54 age group). Stations with radio formats related to news and talk (including sports) experienced modest single-digit growth during this period. However, traditional music (classified by Fitch as adult contemporary, adult hits and other non-urban and non-Spanish music genres) experienced double-digit declines in ratings over the past five years, including a cumulative decline of approximately 10% for the important 25-54 age group. According to Veronis Suhler, the traditional music segment (as previously defined by Fitch) accounts for over 70% of total formats. Many companies within the industry have made an effort over the last few years to rebrand more stations to the Spanish music and News/Talk/Sports formats as these formats have grown over 60% and 25%, respectively since 2000. Despite this growth, with the exception of a few niche players, the largest industry players still have the majority of their station's formatted in the traditional music category and Fitch does not expect a material change in their overall station makeup over the intermediate term. Also, while satellite radio subscriber growth has been strong in recent years, these numbers are a fraction of overall broadcast radio listeners and AM/FM will still be available from most satellite radio receivers. However, Fitch believes satellite radio and proliferation of other media alternatives (including iPods played through car stereos) could continue to pressure listenership for radio broadcasters over the intermediate and long term.

Increases in advertising inventory over the past few years associated with commercial clutter not only affected the listener experience but also put pressure on ad pricing. While it appears Clear Channel's efforts to reduce the level of commercial inventory embarked on in 2005 has gained traction and some competitors have followed suit, it remains to be seen what effect it will have in the long term on industry dynamics. It is uncertain whether the inventory reductions and listenership trend improvements are sustainable, and whether companies will be able to monetize these developments by meaningfully increasing pricing. Advertisers have more alternatives and could start to focus more on mediums that have better return on investment (ROI) transparency such as the Internet. While Fitch believes that other music delivery mediums may pressure the industry's ability to meaningfully raise prices over the intermediate term, it should be noted that radio is not a premium-priced advertising medium compared with broadcast TV and newspapers and will likely experience less pricing pressure.

There are several additional potential mitigants to the pressures described above. In addition to stations that specialize in live local sports and news programming and local multilingual offerings, Internet streaming should assist near-term growth as the industry should be able to push through higher CPM increases for the non-drive-time hours. Internet streaming also allows for incremental introduction commercials as well as banner ads surrounding the media player. Longer term, Fitch believes digital radio will offer growth opportunities for the radio broadcasters to help partially offset an increasingly competitive landscape while providing some opportunities to regain loyalty among listeners (the sound is far superior to traditional broadcast radio). Stations continue to roll out digital broadcasts (Clear Channel intends on broadcasting in digital for 95% of its stations in the top 100 markets by the end of 2007). The digital spectrum allows the radio stations to 'multicast' -- possibly providing incremental revenue opportunities over the long term; however, inventory oversupply issues will remain. Due to a lack of consumer awareness, Fitch does not expect any significant contribution from digital radio over the next 2-3 years.

Mindful of these mitigants and despite the secular challenges the industry faces, Fitch views the cash flow dynamics of radio operators (high margins and low capital expenditure) favorably and believes that companies in the industry could withstand the combination of a cyclical downturn and a stressed secular decline and still be able to generate positive free cash flow. These free cashflow characteristics grant management teams and their Boards of Directors the discretion to manage their balance sheets to their optimal mix of debt and equity. Share repurchases as a percentage of free cash flow have increased significantly over the last several years from the Top 10 radio broadcasters. Fitch believes the industry in 2007 will continue to be pressured by low-growth, possibly leading to continued event risk of further fiscal and strategic policy revisions with the net result generally being negative for bondholders.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria, and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance, and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.