Fitch Affirms Hearst-Argyle Television's IDR at 'BBB-'; Outlook Stable.

NEW YORK -- Fitch Ratings has affirmed the following ratings of Hearst-Argyle Television, Inc. (HTV) and its wholly-owned subsidiary Hearst-Argyle Capital Trust:

Hearst-Argyle Television

--Issuer Default Rating (IDR) at 'BBB-';

--Senior unsecured at 'BBB-'.

Hearst-Argyle Capital Trust

--Convertible preferred securities 'BB'.

The Rating Outlook is Stable.

The ratings reflect the company's strong margins, historically conservative fiscal policies and what Fitch expects to be consistent free cash flow generation over the intermediate term, as well as the company's sizeable and geographically diverse portfolio of TV stations that reach over 18% of U.S. households. Credit concerns include pressured operating trends over the last 18 months-24 months, which has affected margins and free cash flow conversion. In addition, various secular challenges that range from new technologies (digital video recorders or DVR's), competing news outlets on the Internet and mobile devices, and the fact that the major broadcast networks have begun to sell their content on-demand (VOD) continue to be risks. The Stable Outlook is based on HTV's market position as an independent TV station group, Fitch's expectations of free cash flow generation over the next three years, the liquidity to withstand a one-time stress event, and the company's historically conservative fiscal policies that we expect to continue despite what has been a generally weak stock performance.

Credit metrics for 2006 will likely be weaker than the last few even-numbered years (HTV benefits from the Olympics and political campaigns in even-numbered years) due to what Fitch expects to be a partially debt-financed acquisition of CW-affiliated WKCF in Orlando, as well as higher capital expenditures due to various building projects. However, Fitch expects the Orlando acquisition to be immediately cash flow accretive and metrics for 2007 and 2008 should strengthen versus comparable years as the company will likely continue to produce margins above 35% and free cash flow in excess of $90 million per year. The company has traditionally operated in the 3 times (x)-4x leverage range (including preferred securities), and Fitch expects the company to be at the high-end of that range for 2006 and 2007 but return to more normalized levels by 2008, with cash flow to debt to return to over 10%.

Margins adjusting for pension costs have become pressured due to increases in expenses related to compensation, fuel and energy, which have generally outpaced revenue increases. While margins have also been affected over the last few years as high-margin network compensation continues to decrease, Fitch expects network compensation to generally be replaced by retransmission fees over the intermediate term. It is important to note that despite recent trends, HTV's EBITDA margins remain strong at over 36% and compare favorably to the industry. While Fitch does believe that HTV has sufficient liquidity to withstand a one-time stress to revenues, the company's 31% unionized workforce could make it difficult to cut costs in a timely manner should it ever be necessary. The company's free cash conversion (defined as free cash flow divided by EBITDA) has decreased substantially over the last few years (from 56% in 2003 to 27% in 2005) as HTV implemented a dividend and made material contributions to its pension. In addition, cash taxes were higher than usual over the last two years due to settlements of tax liabilities related to prior years. Fitch expects the company's free cash flow conversion to improve in 2006 due to incremental Olympic, Super Bowl and political cash flows, normalized cash taxes, and lower pension contributions, partially offset by higher capital expenditures with improvement continuing into 2007 and 2008 with the assumption that capital expenditures return to more normal levels.

Regarding secular challenges, a primary concern related to the DVR is local affiliates' dependence on promoting their late-night news casts during prime time network shows. In Fitch's opinion, increased DVR taping of network shows could pressure local news viewership, as could the proliferation of additional news outlets on the web and mobile devices. Importantly, HTV has been very proactive in its Internet initiatives. In addition, Fitch believes broadcast television operators such as HTV could have an advantage on the web over other local news sites since they have more robust video content. Network content sales (via Apple's iTunes, Google video, network websites and cable VOD) are also a concern as local affiliates, in many cases, are not part of negotiations. This however is somewhat offset by HTV being the largest affiliate group for the ABC network and second largest for the NBC network. As such, these networks still depend on HTV's affiliates to distribute their programs across a large portion of the country and therefore have an interest in the success of these affiliates. Also, the company's syndicated revenues come from first-run programming (e.g., Oprah, Dr. Phil and Jeopardy), which in Fitch's opinion should not be as pressured by the increase in DVR and DVD sales as are broadcasters who rely on second-run syndication programming.

Fitch believes HTV will continue to look for acquisition opportunities going forward, which could be accelerated if regulatory restrictions are liberalized. The basis for acquisitions will likely be to form duopolies in cities where they already have a top four network-affiliated station (i.e., purchase a station outside of the top four in the demographic, likely a CW-affiliated station). The rationale is the company gains synergies related to certain costs, as well as the possibility to leverage its existing news infrastructure with the CW station, which does not always have local news broadcasts. Mitigating acquisition risk is Fitch's belief that management will be fiscally prudent with its acquisition strategy and the high likelihood that any acquisition will be immediately cash flow accretive with synergy potential. Duopolies could become more prevalent in the next 2 years-3 years as the FCC is likely to revisit the rule that only allows duopolies in cities with 8 total stations by possibly reducing that threshold, which would increase the number of cities that allows duopolies.

The company's liquidity position is adequate and supported by approximately $130 million in cash and $250 million of revolver availability at March 31, 2006. Fitch expects a material portion of the revolver and cash balances to be used for the $217 million Orlando acquisition; however, free cash flow for the remainder of 2006 should exceed $75 million and therefore also support liquidity and/or the acquisition. Fitch does not believe there is material event risk related to debt-financed share repurchases and/or dividends over the intermediate term. Maturities over the next few years are material, as the company's $450 million in private placement notes will amortize annually in five equal $90 million installments beginning December 2006. In addition, the company's $125 million 7% senior notes mature December 2007. Fitch expects the company to re-finance these maturities. Remaining debentures mature in 2018 and 2027. The company's $250 million credit facility matures 2010 and contains a maximum leverage ratio (debt excluding capital trust's preferred securities to EBITDA) of 5.0x and minimum interest coverage ratio (EBITDA to interest expense) of 2.5x post Sept. 30, 2006. The facility also contains a minimum consolidated net worth test $1,045 million + 25% of positive net income beginning with 2005. Fitch estimates this to be approximately $1.1 billion minimum net worth. As of March 31, 2006, the company had net worth of approximately $1.8 billion, which includes $0.7 billion of goodwill. Because of the company's mix of non-bank debt (senior public bonds, private placement notes and preferred securities) there are varying degrees of non-bank covenants. These include change of control provisions in the company's private placements and preferred securities as well as limitation on liens in the senior unsecured bonds and private placements. The company's private placements also contain a minimum net worth test similar to the bank facility covenant. There are cross-acceleration provisions in both the senior unsecured bonds and private placements. Because of the change of control provisions present in capital trust's preferred securities, it is Fitch's policy to classify the entire $130 million principal amount as debt.

HTV is a stand-alone public company, of which the Hearst Corporation indirectly owns approximately 72% of outstanding common stock at March 31, 2006. The Hearst Corporation also owns a 20% interest in the parent company of Fitch Ratings.

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.