Financial experts told the Dickstein Shapiro opening event that many broadcast companies are going to have to rework their balance sheets. But the good news is that the radio business is still profitable, once the debt issues are resolved.
Wall Street is already predicting a recovery. “We’re in the middle of an incredible rlly for both media equity and debt securities,” said Drew Marcus, Managing Partner, Sugarloaf Rock Capital, as he set the stage for the discussion. Of course, that has come after a sharp decline in revenues pressed down those securities. In Marcus view, radio will have to get to leverage of four times debt. Of the public stocks, only CBS is there, with the industry average at nine times, so there will have to be a lot of work done on balance sheets.
Some lenders have been agreeing to swap debt for equity to de-lever overleveraged broadcasting companies. “It’s certainly not a strategy of preference,” said Jeff Ferry, director, Goldman Sachs Specialty Lending Group, whose own company has, indeed, done some of those deals.
Michael Bogdan, Partner, Atalaya Capital Management, noted that broadcasters are taking different stances in dealing with their overleveraged situations. In his view, it’s important to be pro-active and work with your banker on a solution. But he noted that some companies are just standing firm against any reworking of their loan terms. Lender reactions to that sort of stance vary, but some will play hardball and force action by moving to foreclose on assets or accelerate their loans.
Noting that broadcasters have been through a perfect storm that has lowered ad revenues and dried up available capital, Raymond Shu, Managing Director, GE Capital, said the biggest challenge now is for top line revenues and cash flow to stabilize so valuations can stabilize. “There is almost no visibility,” he said.
For now, the huge gap between bid and ask continues in the private market for radio transactions, until there is more certainty. Marcus put the asking price for many properties at 8-8.5 times cash flow, while the bid side is “anywhere from six times to ‘what bid?’”
For some broadcasters having to rework their balance sheets, Chapter 11 bankruptcy looms large as one possibility. For the first time, the Dickstein Shapiro panel included a restructuring firm representative: Kevin Shea of Loughlin Meghji.
“I don’t think many borrowers are inspired to hire guys like me,” Shea noted. But financial reorganization is a necessity for many broadcasters and Shea said his firm has been called in, mostly by lenders, to evaluate about 100 radio and TV stations in the past 18 months – and he doesn’t expect any slowdown in business for some time yet. Shea insisted, though, that management should not fear such scrutiny and called it a “pretty lousy idea” to replace the managers unless they’re doing a poor job. “We really need all hands on deck,” he said of a reorganization situation.