Navigating through tough times

John Brooks

The global financial mess we now find ourselves in is about as bad as anything I’ve seen in 25 years of financing broadcasters. Many of us remember the chill of the early 1990’s when an economic recession took the air out of the real estate and LBO market. The S&L industry and a number of commercial banks crumbled. There was a painfully short list of lenders financing broadcast operators. We thought we’d never see anything this bad again.

Au contraire. What started as a real estate slowdown has become a financial market meltdown. Banks have marked down billions in bad loans, depleting their capital and constricting their ability to make new loans since they are required to maintain minimum capitalization ratios. Treasury’s plan to improve their capital positions by purchasing bank stocks should theoretically alleviate this problem, but results have been slow to materialize.

The impact at the ground level is fairly obvious. Home foreclosures and layoffs have spiked. People feel poorer and spend less. With auto loans harder to obtain, people can’t buy cars even if they want to. Pessimism over the near term begets tighter advertising budgets at a time when the fundamentals of broadcast advertising are not so hot. And so on.

For those of us in the business of making new loans, this has been a particularly challenging environment. Pricing has increased while lending multiples have decreased. This isn’t simply bankers’ mindless knee-jerk reaction. There are several specific factors at work.

1. First, simply put, when the supply of something is constricted the price goes up, whether it’s commercial inventory or loans.
2. New financings have slowed to a trickle, making it difficult for lenders to determine “where the market is” when structuring new deals.
3. In an unusual departure from history, investment grade-equivalent senior loans can be purchased in the secondary market at deep discounts largely because of perceived higher default risk. So the yield on discounted debt can be far greater than the nominal note rate. Imagine buying a station at 10x when you could buy the whole company at a 6x valuation!
4. With a perfect storm of a weak economy coupled with an unprecedented financial meltdown, lenders are concerned about the impacts on revenue and cash flow, valuations and exit options. So what is the appropriate leverage multiple?

We don’t believe that the broadcasting business is going anywhere, but the possibility of any kind of meaningful turnaround before the middle of next year looks pretty doubtful right now. So what to do in the meantime?

1. Keep expenses and leverage low if at all possible, and keep dry powder high for working capital and acquisitions. Competition for attractive buys could be slim.
2. If financially feasible, exploit new revenue opportunities. Cable TV hit a wall when its core business reached a saturation point. Over the years, video declined from 90% to about 60% of revenues, with new products making up the balance.
3. Over-communicate with your financial partners, and keep channels open to other financing options. Good companies and management teams are especially valued in tough times.

Since my grandfather steered my father away from his dream career in radio in 1951 - because it was a “dying” business - more than a half century has gone by and the business has continued to evolve, reinvent itself and flourish. While these are difficult times for all of us they will pass. With hard work, innovation and patience, this business has many good years ahead, and can remain a major player in the new economy once it rights itself.

--John Brooks is Managing Director, Media Originations, Wells Fargo Foothill. He can be reached at john.brooks@wellsfargo.com  415-392-9309