Fitch Affirms Belo's Ratings; Outlook Stable

Fitch Ratings has affirmed the 'BB' Issuer Default Rating (IDR) and all outstanding ratings for Belo Corporation (Belo). The Rating Outlook is Stable. A full list of ratings appears at the end of this release.

The ratings reflect the ongoing improvement in Belo's credit profile, driven by the company's debt reduction efforts as well as improvement in operating profits. Fitch estimates total leverage of 4.3 times (x) at Dec. 31, 2011, versus a peak of 6.0x in the downturn. Metrics are well within Fitch's previously stated leverage threshold of 4.0x, in a political year (5.0x in a non-political year), and place the company at the higher end of the 'BB' ratings category.

Fitch expects a stable operating environment in 2012, with core advertising revenue growth in the low single digits, bolstered by strength in auto advertising (the company's largest vertical). Further, although Belo has smaller exposure to political advertising than many of its local affiliate peers, Fitch expects political advertising to make a meaningful contribution that at least equals the $56 million seen in 2010 (approximately 8% of total revenue). As a result, Fitch expects total revenue growth of approximately 10% in 2012. Although the ratings do not give a material amount of credit to political revenue, given its temporary and volatile nature, it does provide a strong free cash flow (FCF) boost in even years.

Fitch expects Belo to continue to benefit from growth of high margin retransmission revenue, which provides incremental stability and visibility in the operating profile. Retransmission revenue reduces the overall risk in the operating profile as it moves the local affiliate model more towards the dual-revenue stream model of cable networks. However, given the leverage that Fitch expects the broadcast networks to retain over the local affiliates (particularly in an over the top [OTT] world), Fitch expects This revenue will be partially offset by increasing reverse compensation fees to the networks, although Fitch expects the overall impact to remain a moderate net positive to Belo.

Fitch expects Belo will continue to deploy its FCF for the benefit of both equity- and bond-holders. After the 60% dividend increase, Fitch expects Belo to generate nearly $100 million of FCF in 2012 (including a $30 million tax refund in first quarter 2012), and $30 million in 2013. Fitch expects a portion of this cash could be used for acquisitions or share repurchases. Fitch also expects the company to repay at least a portion of its $176 million May 2013 maturity with cash.

Belo maintains significant financial flexibility at current ratings for FCF funded share repurchases and M&A. Given expected stability in the ad revenue base and growth in retransmission revenues over the medium term, debt reduction is not necessary to maintain current ratings. Further, given metrics below Fitch's target, in a stable macroeconomic environment there is room for some debt-funded buybacks, though this would likely remove any potential ratings upside.

The ratings continue to be supported by Belo's strong local presence in the top-50 U.S. markets, with either the No.1 or No.2 station in most of its markets, driven by a track record of making investments in its news infrastructure. Additionally, the company benefits from a diverse array of top network affiliations (excluding Arizona). These dynamics are expected to offer more protection from secular pressures than lower rated stations or weaker affiliations, and as such, Fitch would expect Belo to compete effectively with print products, radio and other broadcasters, for local ad dollars over the intermediate term.

Long-term secular risks continue to be present related to declining audiences amid increasing entertainment alternatives, with further pressures from the proliferation of OTT Internet-based television services. However, it is Fitch's expectation that local broadcasters, particularly the higher-rated stations, will continue to remain relevant and capture material audiences that local, regional and national spot advertisers will demand. Retransmission revenue reduces the overall risk to the operating profile.

Fitch does not anticipate a negative impact to Belo from the recent legislation authorizing the FCC to conduct a voluntary incentive auction of broadcasters' spectrum, for purposes of reallocation for wireless broadband use. It is unknown whether and to what degree Belo or other local broadcasters would participate in the auction, as well as auction timing. Belo plans to deploy the spectrum not currently used for traditional television broadcasting for multicast stations and mobile applications, and Fitch does not expect the company to sell spectrum that would impede these plans.

Further sustainable deleveraging below 3.25x in a political year and 4.25x in a nonpolitical year (assuming a similar business risk profile), as well as clarity around the repayment/refinancing of the 2013 maturity could result in positive rating actions. Fitch would be unlikely to take positive rating actions in a volatile macroeconomic environment given the cyclicality of the business. A more aggressive use of cash than anticipated for M&A or share buybacks could also have rating pressure. Negative actions could occur if cyclical or secular pressure results in leverage outside of Fitch's current threshold, with no ability to get back in a reasonable amount of time.

Fitch views Belo's current liquidity as adequate, with more than $100 million of cash on hand (pro forma for a $30 million tax refund in January 2012) and $194 million available under the undrawn $200 million revolving credit facility (RCF; net of letters of credit). The company has grown its cash balance since the repayment of its RCF in early 2011. As stated Fitch expects some of this cash to be used for potential M&A and share repurchases, with a portion likely used to repay some of the May 2013 maturity.

As of Dec. 31, 2011, there was $891 million face value of debt outstanding, consisting of:

--$176 million of senior unsecured notes maturity May 2013;

--$275 million of guaranteed senior unsecured notes maturing November 2016;

--$440 million of senior unsecured notes maturing 2027.

Fitch affirms Belo's ratings as follows:

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

--Guaranteed RCF at 'BB+';

--Guaranteed senior unsecured notes at 'BB+';

--Non-guaranteed senior unsecured notes/bonds at 'BB'.

The 'BB+' rating on the RCF reflects the senior guarantee from substantially all of Belo's domestic subsidiaries, as well as the absence of secured debt in the capital structure. Although the guarantee on the senior unsecured 2016 notes is contractually subordinated to the guarantee on the bank debt, Fitch equalizes the ratings on the two obligations, given Belo's enterprise value and the portion of total debt and leverage comprised by both tranches of debt. The legacy notes are not guaranteed and are therefore notched down one from the guaranteed debt.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Evaluating Corporate Governance' (Dec. 13, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657143

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Contacts:

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Rolando Larrondo, [phone]
Director
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