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Moody's Warns Station Groups of Revenue 'Threat' From Reverse Comp

Coughing up the reverse compensation will put station groups in an increasingly tight spot, according to a new report from Moody's. Increasing network payments dampens the local broadcasters' cash flow, and will force them to put more pressure on subscription-TV operators to grow the retrans pie.

"As the four major U.S. networks renew their multi-year contracts with broadcasters, the networks have increased their demands for 'reverse compensation,' which will pose a risk to broadcasters' cash flow in the near term," says Carl Salas, Moody's vice president and senior analyst. "The broadcasters' EBITDA will be giving up a meaningful portion of a once-steady, high-margin contribution to their cash flow. The broadcasters can only offset this pressure if they can negotiate significant increases in retransmission fees from cable and satellite television providers."

Station groups have been heavily reliant on retrans cash since the advertising market cratered a few years ago. Moody's said reverse-compensation fees to the networks "will negate the near-term increases in retransmission fees that the broadcasters receive."

Among the pure-play broadcasters that Moody's rates, retransmission revenues increased by a compounded 54% annually from 2006 to 2010. The new report forecasts continuing double-digit annual growth in fees, resulting in a three-fold increase in retransmission revenues by 2017.

The networks' increasing demand for reverse compensation will have a near term negative credit impact on broadcasters, the report adds.