RBR-TVBR Financial Roundtable 2010: Part 2 (audio)

The 5th Annual RBR-TVBR Financial Roundtable continued with a discussion of the troubled broadcast loans that lenders are still dealing with. But, is M&A finally picking up?

This year’s participants:

JM Jack Messmer, RBR-TVBR
MF Mark Fratrik, BIA/Kelsey
RS Ray Shu, GE Capital
LW Lee Westerfield, BMO Capital Markets
DM Dave Meier, The Gladstone Companies

JM: Obviously one of the reasons that the lenders have been not lending and some of them have exited the market is that they have some troubled loans in their portfolios.  Have most of those been dealt with or is that still going to take a while for the lenders to work through all those troubled loans?

RS: I believe the lending community is making headway in terms of working its way out of its troubled broadcast loan portfolios but it is by no means over yet.  My sense is that it might take another year or so before the lending community can probably say that the worst is behind them.

LW: I agree with Ray on this.  There’s no question that the loans across television and radio are going to mature in tides over the next two to three years, and in many cases will be maturing at a point when leverage levels might be un-refinanceably high at the senior lending level.  So between broadcasters and lenders there is a considerable amount of work yet to be done to manage through the maturity process if you will. But having said that, the degree of patience at my own firm for working with clients remains high, and that’s being driven by experience that BMO has over several decades in broadcasting and the confidence that radio and TV will remain highly profitable, free cash generating business models that can support financing.

DM: I would agree with my colleagues. There have been some high profile transfers to the lending community in terms of ownership transfers.  There have been a number that have not gotten the notoriety that have been in the smaller end of the market.  Until these lenders are able to transfer ownership back to a more traditional investor group, the industry is not going to be able to reach a level of normalcy. There’s still more to come, but I think absolutely we’ve made a lot of progress.  I do think that there are still some things to work through here and it may take up to a year or longer for that to be completed.

MF: Dave you raised an interesting point there and I wanted to follow-up first with you on this and everybody else can add in.  How long will the suddenly new owners of broadcasters, broadcast stations, broadcast properties keep these properties?  Is there really a strong drive to dispose of them within three months or will they be looking for much longer time horizon to get possibly even higher value?

DM: I think it depends on the lender.  Generally speaking these folks are owners because they have to be owners.  Lee noted the fact that the lending community has been very patient in this cycle.  They’ve had to be very patient because they recognize that there’s not a reasonable exit for them.  As I noted before, there’s very little M & A activity so what is the recourse for a lender that’s an owner today?  My sense is that they will maintain their patience and they will continue to observe the market.  As soon as they sense that the market activity is starting to pick up, and as soon as there’s a clear guideline as to valuations, you’ll start to see some of these lenders exit as soon as they possibly can.  Others probably, depending on their balance sheets and their strategic philosophy, may hold these assets for one to two to even three years in this environment.

RS: I agree with Dave’s comments.

JM: We’ve been talking about senior lenders. I would note that we’ve had some activity though in the high yield bond market, is that going to continue as the preferred place for broadcasters to find money in this tough environment?

LW: The answer is yes.  There’s no question that currently the high yield markets are attracted to the broadcasting space.  The high yield offers flexibility versus terms that banks will typically require – at a cost – and so high yield markets are a welcome alternative to some of distressed broadcasters who are looking to refinance out maturities and relax covenants.  There have been several high profile examples: Belo, Salem, Sinclair in the Fall, and several more are likely to come in the near term.  So in short, the idea of pushing out maturities through the bond markets as a way relax covenant restrictions that and ease amortization schedules – these features attractive to issuers right now.

JM: How large does a company really have to be to be able to tap that market?

LW: Size? Roughly one-hundred to one-hundred-twenty-five million at a minimum – and more likely one hundred-fifty to two hundred million dollars would be preferable and still at the lower end of the range in size.  There is an alternative emerging in the Term Loan B marketplace for some issuers, too – those that have to refinance in the one hundred to one hundred-twenty five million dollar range on up.

MF: I want to shift it a little bit in terms of okay we’re seeing some signs of a recovery both in media and the economy as a whole and as all of you earlier said that before things really open up a lot we need a few more months or quarters to really get things moving along in terms of M & A activity and financing.  Assuming that we do get those consistent months of growth economy wide and industry wide, what areas do you see as the most active at the beginning when financing comes back? What type of assets do you think where there’ll be lots of people standing in line to acquire?  Are we going to see small market radio be an area, or is it going to be affiliates in television stations in mid-markets or is it going to be some clusters of radio stations in large markets that heretofore weren’t being sold?  Do we see any particular area?

RS: I think in terms of maybe first comparing sectors, I do believe that access to capital is probably a bit easier right now for TV than radio and I think that’s generally driven by the fact that the TV sector seems to be ahead of the curve in terms of demonstrating growth.  I think radio is lagging, but I think once radio does bounce back I think you probably will see more of an appetite for radio.  In terms of whether it’s the larger or smaller markets, I think that really depends on the investor.  I think there are definitely different classes of investors.  Some investors view the larger markets to be more attractive just given the competitive dynamics and the demographics associated with the larger markets and its ability to cross-sell digital media, but some people prefer the more local and live attributes in the smaller DMA markets.  I really think it depends on the investor and their strategy and what they find more attractive.  To finish that off, I think the one sector where you will see probably the least amount of interest is in stick lending whether it be TV or radio.  I’m thinking the height of the market there were definitely more than a few lenders out there who were very active in lending against TV or radio sticks where there was no cash flow. And obviously as valuations decline substantially, those lenders got hurt tremendously and that’s probably the one end of the market where I don’t really see that coming back anytime soon.

LW: As I see the next 18 to 24 months evolving, with regard to M & A, there are four themes: One, in radio, to create “super regional clusters”; this is really an operationally-driven strategy around building regionalized efficiencies.  Two, another theme will be “to vertically integrate programming and distribution” ; this is really going to be effective in the ethnic marketplaces, the Asian and Hispanic markets, to create the combination of programming and distribution in television.  Three, spin-offs from the large media owners who have portfolios where some of the assets are simply not as well looked after since the assets are non-core; as they get spun out, they may be sold through combination with some of the smaller mid-sized radio or TV groups.  The fourth and final theme will really be the shotgun marriages, if you will, through distressed credits as they come up for maturity.  But I’d agree with Ray, absolutely, that the stick marketplace is not one that BMO is keen on providing lending capital to.

MF: Dave any area you’re seeing or you’re thinking that will come back quickest?

DM: First of all we’re in full agreement that the stick market is dead for the foreseeable future.  This idea that there’s this franchise value, that theory has been damaged severely and I don’t think folks will emerge in that sector for many years to come.  Deal activity will mirror what’s going on in the general industrial market – which is to say that the bigger deals are going to get done more readily.  As you move down market, some of these smaller companies are going to be difficult to finance.  That’s generally because the number of participants is going to be far fewer.  I have heard this number many times in the past that if you are a company with less than 10 million dollars in EBITDA today and you’re looking for a cash flow oriented loan, that market is very slim to say the least.  I think that that situation may continue for some time to come.  The other point I would make, first of all I agree with Ray that it seems that TV is deemed to be more attractive and probably will continue to be more attractive for the foreseeable future.  One profile that bears watching is small market versus large market performance. I think that this year, we will see large markets out performing small markets as the national advertising hopefully comes back.  It will be interesting to observe how that trend unfolds over the next couple of years.  I’m biased, and Mark as you know I’ve always been more focused on the smaller end of the market.  I do think that that sector of the market will continue to be very attractive for a number of reasons and it will be interesting to see if others latch onto that theme.

MF: One other thing I wanted to follow up on and many of you are aware BIA is now involved in analyzing more than just the traditional over the air revenues but other non-traditional mostly online revenues.  How important in when you’re evaluating new deals or as you will evaluate these deals is activity in non-traditional areas and primarily let’s talk about online.  How important will you think it is for deals to get adequate financing to show that activity – if at all?

DM: I think that generally speaking the best broadcasters are tapping into non-traditional revenue and they’re doing a lot of different things than they weren’t two or three or four years ago and therefore, as you evaluate management teams, you’re going to generally gravitate toward those teams that know how to generate multiple revenues streams.  Having said that, I think that online revenue, for example, in our portfolio, is a very small piece of the puzzle.  It probably will not account for a substantial portion of revenue for the foreseeable future, so I don’t think that it’s necessarily a non starter if broadcasters haven’t developed that revenue stream.  Generally speaking, the best broadcasters are working to develop those non-traditional and online revenue streams.  So by definition I think you’re going to evaluate those management teams more favorably.

LW: I take a slightly different view.  Digital and Internet opportunities for TV and radio from the standpoint of the capital markets are going to be the growth driver, and so will be the driver to attract new equity and to underpin M & A.    Internet is going to be a theme that’s going to have to develop to attract equity capital, while consolidating several groups together could attract lending capital to support growth of an existing group operator.  The reason for that is because there is no consensus in my opinion among lenders about the consistency of the NTR and Internet revenue from the standpoint of its consistent profitability and its credit worthiness. But there is potential excitement for equity investors to come in and around digital media themes.

MF: We’ve got a disagreement here Jack.

DM: Let me just make a point though, Mark.  I would say that there’s really no disagreement.  My focus is as a lender and my focus tends to be on the smaller types of enterprises.  What Lee said makes a lot of sense, but  I do not place a heavy emphasis on that as I evaluate a lending opportunity, whereas he may when he’s looking at equity and capital formation issues.

JM: Did Ray want to weigh in on this one?
 
RS: It is definitely a variable that we look at and I think a lot of that has to do with the ability to grow the digital online revenue stream.  It’s a way for us to access management and their strategy because part of that can be viewed as a defensive strategy to protect your core business.  Also, we’ve all seen the demise of newspapers, right?  You can look at if the company is more proactive and growing the digital media business then it’s a way to play offense and try to take market share away from its competitors, not so much within their sector, but across the different mediums in a given market.  It is definitely a variable that we look at.

JM: Let me turn to Washington since these are very regulated industries.  Is there anything being proposed by Congress or the FCC that you think would give a boost to the radio and television businesses and conversely anything that scares you out of Washington?

MF: Outside of Washington itself.

RS: I think the one topic that all of us on the phone are always keenly following is the FCC crossownership issue and how perhaps that gets redefined.  I think if the ownership rules loosens up, then I think you could expect to see an increase in M & A activity, both within each  individual sectors, but perhaps also across different sectors where a newspaper company may merge with a broadcaster and so forth.  The operating synergies are pretty obvious to everyone.  I think if the ownership and the crossownership rules are loosened I think you will see definitely an uptick in M & A activity.

LW: I think certainly the crossownership rule, if that ever were to get re-evaluated and relaxed, would be a positive to attracting investment capital to the broadcasting space. Other areas where investors place a lot of attention is to the [Performance] Royalties Act in radio, if ever that bill were to surface out of committee.  At this point I think the consensus view is that that’s stalled in committee.  The second area of attention is to the FCC’s review of wireless broadband policies – and potentially the reallocation of spectrum - from television into wireless broadband as a long term policy matter.  Right now it’s really hard to judge exactly how that would affect TV broadcasting assets individually, or even how far the FCC can move forward with these new policy ideas. As a practical matter, I think we need to look closely as to which TV assets might be in play under any new broadband policy initiative, and secondly how the transfer of that spectrum and the economic value of that spectrum would be transferred over time, if ever.

MF: Lee made some reference earlier to the potential of double dip recession and he even made some reference that if we got back into an economic downturn in 2012, I think you mentioned Lee, because of some maturities that come due then.  What assumptions are you all working under over the general economy and how much uncertainty do you have with the general economy in determining granting loans and getting financing, providing financing?

LW: At BMO you know that’s really an institutional question at the highest level of our organization, that’s not a question that is determined on my desk.

MF: They give you a GDP number and you work with that?

LW: No, not so much. The way that type of macro-economic question gets weighed is through sector exposure and credit hurdle requirements for credit for new lending we might consider.  There are varying views on the macro trends, and as always with little clarity looking into the crystal ball. So looking forward into that kind of cyclical recovery trend, we’re taking a very measured approach to how to allocate the firm’s balance sheet to new clients – and then commit to long-term relationships.

DM: Gladstone does not take a position on economic forecasting, but I would answer the question this way: Our focus going forward is going to be placed on fixed charge coverages and liquidity and ability to whether downturns.  In the past that the metric, the shorthand that folks used pretty readily, was loan to value.  That is going to become a secondary metric and we’re going to tend to underwrite broadcasting deals a lot like we would underwrite a plastics deal or a metal processing company.  We’re going to look at the liquidity of the business, look at the fixed charges of the business and determine whether we feel that this particular transaction can weather a significant downturn.  So we really won’t focus on economic projections but rather we’ll look at the deal individually.

LW: Dave’s hit the nail on the head. BMO takes a similar view. 

JM:  Thank you to all of our panelists.

Click here to read Part One.

Want to see how things have changed in a year?

Click here to read Part One of the 4th Annual RBR-TVBR Financial Roundtable.

Click here to read Part Two of the 4th Annual RBR-TVBR Financial Roundtable.

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