There’s a bit of an untold story we’re hearing that’s out there involving broadcast station finance – at the M&A level. Because of the unprecedented downturn in 1) The fortunes of ad-supported broadcast radio/TV and 2) The monumental disruption in the worldwide capital markets, we’ve got a situation where probably 90% of all broadcast station licensees that did some kind of restructuring, M&A or something similar in the last five years, are at the very least in some kind of technical default with their lenders today.
Here’s the interesting pattern: from what we’ve heard, there are relatively few cases of borrower and lender/provider of capital going into litigation/bankruptcy to settle their disputes (we reported on one today, in fact). What seems to be quietly happening is there are a lot of cases where institutional equity (i.e. The Alta Capitals of this world) companies have come to the realization that their deals are so far upside down that the prospects of ever getting anything out of them are very low – at least in their planning horizon. So what they’re doing is, rather than try and fight foreclosure, they’re basically saying to the senior and subordinated lenders, “Look, pay us the money (as one source tells us it was termed ‘hush money’) to go away, and with our tacit approval we won’t fight foreclosure.”
The net result is how few of the transactions out there are going into litigation. This is a marked contrast to the previous downturn in the early 1990’s, where there was a lot of litigation. This all probably reflects two things: 1) Almost all of the equity in the deals done in the last five-six years has been institutional money. 2) The deals done in the late 80’s, under different ownership regulations, still had a lot of transactions where effective control of the corporation that was the borrower was from a broadcaster – someone who was emotionally involved in the success or failure of the deal. And much like if you were about to be foreclosed on an owner-occupied home by a mortgage company, you’re very hesitant and you will fight foreclosure because your ego is involved.
What we’re not seeing this time around is that kind of fighting. Part of it is, again, that we’re certainly more underwater than we were in the 90’s; and the venture equity companies are pragmatic economic entities, and they’re just going to take their losses and run. They may have already written down the assets, so they’re getting the million or two million dollars they would have spent in litigation.
And whenever you get unexpected cash coming in on a bad deal, accounting standards treat that as an extraordinary gain. So in effect, if you’ve recognized and written down a good part of your investment in 2009, the money that comes in as “go away” money (one or two million dollars) comes in in 2010, it’s found money.
Another reason for institutional equity doing this is the other avenue — to make tangible changes and improvements in the operations of the stations. This often requires additional capital for promotions, staffing, and alike. And for any financial institution — debt or equity – there’s an anathema to putting good money after bad.
So the consequences of all of this are, clearly, the broadcast industry has lost its sheen in the eyes of Wall Street. Not many analysts or lenders left, right? The GECC team is still there — whittled down — but they are not going forward with much. However, there will probably still be play in trading of the discounted debt. If the market changes, they will have the head start. Goldman Sachs Specialty Lending has retained its broadcast lending/equity group. CIT still has a couple of people who are riding herd over their existing radio/TV loans.
We hear there are a lot of players out there right now buying discounted debt, including a number of funds created specifically to focus on the media sector. There is very active trading out there right now of “public debt” from companies whose equity ownership (to the extent that any equity still exists) is private. For example, Cumulus’ acquisition of Susquehanna – now known as Cumulus Media Partners – which is legally not part of the publicly-traded Cumulus Media. There’s a close relationship, but they are legally independent. Cumulus provides management services. That debt is very public and is trading. So that seems to be where the action in trading is. As well, Moody’s has actually upgraded Clear Channel’s debt, saying they do not believe a bankruptcy filing is imminent.
RBR-TVBR asked for comment – is it a trend or not?
Wells Fargo Securities’ Bishop Cheen:
“As we have noted in numerous investment commentaries in our Weekly Time & Space, this is very much a work in progress. On the public investment side (institutional investment) there are hedge funds with two distinct strategies–
1) loan to own…or buying up distressed bank debt where the strong covenants are involved with the goal of achieving voting control of the assets and thus in a restructure, the distressed investment fund would own the assets.
2) Value investor. Other more traditional distressed debt buyers are simply in for the arbitrage….buy low, sell high. they believe the debt securities are at their nadir and will appreciate to higher level as the recovery continues and workouts are indeed worked out.
In the past, we have seen the process take all sorts of avenues and time frames What is missing this time around compared to say the credit crunch & recession of 1990-92 is a catalyst such as the Resolution Trust Corp (RTC) that was created to buy up and liquidate distressed assets—including at the time lots of inappropriately capitalized media assets. Thus, without an RTC to serve as a magnate to more rapidly resolve distressed situations, I suspect this recap process will take a lot longer to be resolved.
As for motivating venture equity to exit, I think it is very much a ‘depends’ situation—depending on how the deal is structured, how much they have into the initial financing, how their own investment partnerships are structured for the possibility of defaults, etc…..so I can’t really tell you that I am aware of a prevailing trend right now.”
John Tupper, Kepper, Tupper and Company:
“Clearly, confidence in the survival of broadcasting is rising. With a rational balance sheet, potential for growth in cash flows and therefore values is inevitable. Growth in values will once again attract traditional sources of capital.”
Glenn Serafin, President, Serafin Bros., Inc.:
“I have no knowledge of any such situation. Secured lenders are loathe to pay equity holders anything. Institutional equity and management equity are different in that management submits to keep jobs and payrolls (theirs and others). Management also has ‘cooperation agreements’ and maybe personal guarantees which result in acquiescence. Institutional equity has no such incentives. Institutional equity is out of luck. What owner/operator equity holder will risk his home and lifestyle to defy his secured lender and defend his institutional equity partners? The answer is not one.
I don’t think the VC are getting anything. A payout by secured lenders to unsecured institutional equity would never pass the smell test in banking circles. How does the ‘workout’ agent defend that? He can’t consider this; the bank or whoever is secured is under water by $40 million, but to “keep the peace” it pays a venture capital company or hedge fund $5 million? Hardly. It never, never, never happens.
A lot of debt is available for purchase, but it’s not happening. It is priced low, I hear, but institutions generally don’t like to buy the problems of other institutions. More likely it will be private investment companies who will fill the void and buy assets or debt at discounts to historical values — much like Endeavour Capital did with Larry Wilson in Portland, Oregon. There will be more and more of that ahead.
I believe, that radio will be more and more locally owned and operated, a kind of “back to the future” evolution.”
Mitt Younts, EnVest Media:
“At least in closely-held media companies, lenders may realize in ‘booting’ the current owner-operator-borrower, you may lose your best shot at a recovery. The station foreclosure process runs the gamut from “tossing the keys on the table” to a court appointed receiver. Then what are the options? Lender directed asset management while finding a new buyer? Let’s not forget the FCC license asset. Beyond rights to the proceeds from a forced disposition, no lender yet has perfected a security in that asset.”
RBR-TVBR observation: Bottom line, the institutional money that drove up prices seems to be exiting. The question now is will high-net worth individuals back broadcast entrepreneurs who believe in them? This whole phenomenon is hopefully setting the groundwork for the re-entry of the broadcast entrepreneurs buying up stations, backed by private lenders – the pendulum that started swinging one way after 1996 dereg, will swing back. It already is, in fact.
RBR-TVBR note: We invite industry comment on this — either at the end of the story or send it to: [email protected]