• by Erik Sass  @eriksass1, September 1, 2009

In another sign of trouble for the nation's largest radio broadcaster and outdoor advertising company, Clear Channel Communications' credit rating has been downgraded by Standard & Poor's Rating Services from "CC" -- indicating high vulnerability -- to "SD," which stands for "selective default." According to this rating, Clear Channel Communications has, in essence, already defaulted on part of its debt.

The decision to downgrade Clear Channel's credit rating came on the heels of a buyback of $412 million of debt for about $156 million, representing discounts of 30% to 50% on various classes of debt.

Debt buybacks of this sort take advantage of creditors' fears that they will never be repaid the full amount, and therefore should get out while they can. While the transactions are voluntary, S&P says they basically amount to a default, since they anticipate such an outcome at a later date.

S&P declared all five major classes of debt in the buyback offer to be in default, including notes that were scheduled to come due from 2011-2014. The credit-ratings service conceded that the elimination of $412 million of liability will help Clear Channel's financial situation, but noted that it still faces $1.4 billion of debt coming due over the next couple of years.

S&P also expressed concern that the weakening performance of Clear Channel Radio put the company at risk of technical default under the terms of its lending covenants, which require that it maintain a ratio of debt to pre-tax earnings of no more than 9.5-to-1.

Among big media companies, Clear Channel is not alone in getting the "selective default" rating. In June, S&P lowered McClatchy's rating from CC to SD after the company arranged a similar debt buyback at a discount of about 70% the old debt.