In its report, S&P lowered the rating "to reflect its continued concern about the company's evolving corporate governance issues, stabilization of the senior management team, and the potential business impact of the negative media coverage of the company since May 2007â. Furthermore, S&P supports its rationale with financial metrics that the Company believes have been calculated in a manner that does not accurately reflect the Companyâs operations. The Company believes S&Pâs downgrade is not merited and remains confident in its creditworthiness.
The Company emphasizes that it is currently in full compliance with, and in some cases exceeds, the corporate governance requirements of the Tokyo Stock Exchange, and its subsidiary Xinhua Finance Media (âXFMediaâ, NASDAQ: XFML) is in full compliance with NASDAQ and Sarbanes-Oxley requirements.
S&P also expressed concern over recent senior management changes at the Company. Since June 2007, there have been two departures of senior management at the Company, XFL CFO, Gordon Lau and XFL Investor Relations Managing Director, Sun Jiong. Neither of these management changes has compromised the Companyâs earnings-generating ability as suggested by S&P since these roles do not have direct impact on earnings-generation. Senior management overseeing operations such as CEO and Founder, Fredy Bush, COO, Daniel Connell, and President, Jae Lie, have been with the Company for many years.
Moreover, the Company has had in place an effective succession planning process for changes in senior management. Current XFL CFO David Wang worked alongside Gordon Lau for more than six months before the departure to ensure a smooth transition. Current Investor Relations Director Jennifer Chan Lyman has been at the Company for more than three years, worked with Sun Jiong for over a year and continues to manage the Companyâs global investor relations program.
XFL CEO Ms. Fredy Bush said, âWe understand the ratings agencies are under enormous pressure at this time given the sub prime debt situation. However, it does not merit unduly punishing companies with subjective rather than objective criteria, based on innuendo rather than concrete examples. The Company is in full compliance with all relevant regulations, and the executive management team is strong and producing better returns than the Company forecasted going into this year, notwithstanding the misleading and inaccurate news articles.â
With regard to the financial metrics cited by S&P, the Company believes that the calculations behind the 11.6x of total debt to EBITDA ratio from July 1, 2006 to June 30, 2007 and the 1.1x EBITDA interest coverage ratio of for the first six months of 2007 do not reflect the true financial condition of the Company.
S&P provides their methods for calculating EBITDA and total debt in their report. For first half 2007 EBITDA, S&P excludes US$3.3 million in non-cash Employee Stock Ownership Plan expenses, non-operating cash income of US$2.7 million and US$4.2 million in interest income. These cash-related items reflect the ability of the Company to service its long term liabilities. Including the items, the Companyâs first half 2007 EBITDA would be $18.7 million and trailing twelve month EBITDA would be $30.8 million. As clarified in their report, S&Pâs total debt for the company includes finance leases of $117.3 million arising from XFMediaâs operating agreements and license agreements. Excluding these finance leases, the Companyâs total debt would be $106.9 million rather than $224.2 million.
Based on the above, ratio of total debt (including finance leases) to EBITDA from July 1, 2006 to June 30, 2007 is 7.3x and ratio of total debt (excluding finance leases) to EBITDA is 3.5x. The EBITDA to interest coverage ratio 2.4x for the first six months of 2007. The Company believes that these ratios better reflect its true financial condition and debt-servicing capability.
Lastly, even using S&Pâs total debt figure of $224 million, the Companyâs net debt figure is at $28 million, based on total debt of $224 million (which includes finance leases), less consolidated cash on hand of $156 million and less US$40 million in short-term note investments that mature in late October 2007.
Ms. Bush added, âOur business remains strong. We continue to leverage the Companyâs unique position in China to pursue growth opportunities and increase shareholder value.â