As a sign of the times last week’s NAB Radio Show’s opening Dickstein Shapiro financial session featured the first-time-ever appearance of a bankruptcy expert as a panelist. And while Chapter 11 may be in the cards for some companies, RBR-TVBR talked afterward with Kevin Shea of Loughlin Meghji about the ongoing financial restructuring of the broadcasting industry.
“The restructuring cycle will continue through 2010,” he told us. Restructuring, however, does not always mean a filing in a federal bankruptcy court. “Any other solution is preferable to a bankruptcy,” Shea said. Bankruptcies, he noted, are expensive and disruptive to employees.
Shea and the Loughlin Meghji have thus far evaluated about 100 radio and TV stations as they’ve worked on restructurings at a half-dozen or so companies. Of course, he doesn’t identify his clients publicly, but we know that one of the restructurings his firm was involved in was Young Broadcasting, because that one did go to Chapter 11.
Shea noted in the Dickstein Shapiro session that his firm is usually retained by lenders, noting that “I don’t think many borrowers are inspired to hire guys like me.” Nevertheless, Loughlin Meghji was handing out information and business cards at the Philly gathering – seemingly making the point that a restructuring consultant doesn’t have to be the enemy of management. They can advise borrowers as well as lenders.
“The ad recession is not the fault of broadcasters,” Shea told RBR-TVBR. For many broadcasting companies, the problem is not the way they’re being run, but rather falling cash flow. He calculates that fixed costs accounted for about 78% of spending at radio and TV stations, so in the face of an advertising downturn management couldn’t cut costs fast enough to maintain cash flow.
Lenders didn’t see the recession coming any more than broadcasters did. Since record keeping began after World War II, US advertising revenues had never declined for two years running – until 2007 and 2008. And now with ad revenues down for the third straight year in 2009, lots of loans made for broadcast acquisitions and LBOs in recent years are running into covenant defaults or even payment defaults.
We asked Shea whether most of those over-leveraged broadcasters will end up in Chapter 11. “It depends on how the credit agreements are worded,” he answered. Some require near unanimous agreement and some a lesser majority of lender support to rework the terms. He noted that some lender groups can get gridlocked when they can’t agree on the terms of a restructuring. That’s when Chapter 11 may be the only option.
If you’ve been following the bankruptcies and out-of-court restructurings reported by RBR-TVBR, you may have noticed that the company managers are not being thrown under the bus by their lenders as they become owners. “Good operators are hard to find,” Shea said. Part of what he does in evaluating the condition of a broadcasting group is to determine the strength of the management team. After all, somebody still has to run the company after the restructuring is done.
RBR-TVBR observation: Yes, it’s a bitter pill, but some balance sheets are so unbalanced that no amount of economic recovery can come fast enough to clean them up. If that’s your situation, time to swallow that pill and find a more refreshing chaser.
We noted how Jason Elkin was jubilant this week about New Vision emerging from Chapter 11 – even though his personal stake in the company was wiped out. In truth, his stake was wiped out long ago and he faced up to that reality and moved on. Now, heading a debt-free company, he is charged up to go out and make it grow.
Rather than drag your heels as a worsening debt situation puts strain on your operations and drives down employee moral, better to face reality and find a way to come to terms with your lenders. Getting a restructuring done sooner, rather than later, means you will be able to get back to broadcasting instead of arguing with your creditors.