With economic storm clouds gathering, offline media companies stand to be drenched.
A report from Moody's Investors Service on Wednesday says media outfits with exposure to print and broadcast advertising will be the most vulnerable players in the sector in the event of a recession.
Moody's says Internet search-related advertising, a market dominated by the likes of
, is better off because it's cheaper and more responsive.
"Because of the drain on traditional branding in favor of creating a robust Internet presence and search-engine links, companies highly exposed to only the branding element of advertising have come under pressure," says Moody's in the report. "We anticipate the continuation of this trend will lead to increased spending on Web site creation and search at the expense of more costly brand-building efforts in traditional media."
With the U.S. housing slump shaking the world's financial markets, Moody's believes that the risk of a recession has reached its highest levels since 2003.
In the media sector, companies that could lose their investment-grade credit ratings in the event of a downturn include newspaper publishers
New York Times
, as well as radio broadcaster
Clear Channel Communications
, the ratings firm said.
Those with the least potential for vulnerability include
Time Warner Cable
, the report said.
"We want to highlight varying degrees of rating vulnerability should recent disruptions in the U.S. housing, subprime mortgage and credit markets begin to more broadly affect job creation, consumer confidence, and overall economic activity," said Moody's Senior Vice President Neil Begley in a press release. "Such a contagion could negatively affect revenue at rated firms because of exposure to economically sensitive consumer and business spending, particularly print and broadcast advertising."
Moody's and its credit rating counterparts, Fitch Ratings and
Standard & Poor's, are receiving criticism for their role in the subprime mortgage debacle. They issued investment-grade ratings on complex mortgage-backed securities that were laden with high-risk loans now in default.
Moody's was careful to say that it's not forecasting a recession, but many market watchers view the recent turmoil in the stock market as a sign that the five-year bull market could be over.
Weak showings from a string of economic reports, as well as recent slowness in retail sales, suggests that the housing downturn portends a pullback in consumer spending that could spark a recession. That would inevitably lead to a drop in advertising budgets, which could then cause pain in the media sector.
The report from Moody's said Clear Channel,
are on review for a downgrade related to recent merger-and-acquisition activity.
Clear Channel is being taken private by a leveraged buyout group. Thomson is buying financial news publishing rival
, and Dow Jones agreed to be acquired by
"Liquidity can be an overriding rating issue and rising default rates and reduced market liquidity go hand in hand with economic contraction," said Moody's analyst John Puchalla, the report's co-author. "If market access diminishes, reliance on external committed bank facilities could create vulnerability to the extent that agreements with the banks include language with conditions to funding."
Puchalla also noted that most investment-grade companies in the media industry generate free cash flow, and debt reduction from cash flow and asset sales can mitigate prospective downward rating pressure in a recession.