Q4 and full year 2011 financial results for Radio One were far from impressive, but high-yield bond analysts Bishop Cheen and Davis Hebert at Wells Fargo Securities have been crunching the numbers. They’ve reiterated their “outperform” recommendation for the company’s publicly traded bonds – at least for patient investors.
Those 12.5%/15% senior subordinated notes are payment-in-kind (PIK) toggle notes which currently pay 9% in additional notes and 6% in cash (15% total) but go cash pay at $12.5% beginning May 16, 2012, with the first payment due November 15, 2012. So the analysts had to look at how well the company will be able to handle the additional cash interest payments.
“The incremental cash interest could be about $10 million annually (our estimates) on top of about $57 million of annual cash interest (not including TV One’s debt service of 10% on $119 million, which is paid by that division). The math involves about $315 million of bonds going from 6% cash pay, 9% PIK to 12.5% all cash pay on May 16 (payable quarterly). Thus, we think Radio One could still generate about $13 million of free cash flow this year assuming capital expenditures run about $7 million — or the same level of capex spent in 2011. We would like to see all of it used for debt reduction, but the company still has $5.6 million left in its $15 million restricted payments basket for stock buybacks. In FY 2011, the company repurchased 4.3 million shares of its Class A and Class D shares for approximately $9.48 million,” the analysts wrote in a lengthy analysis of Radio One’s revenues, cash flow and leverage.
Cheen and Hebert decided to look at the underlying asset value of the parts of Radio One and concluded that the total asset value was $899 million, while net debt was $668.9 million, so asset coverage of the net debt worked out to 134%.
“Our exercise has helped us to focus on inherent, albeit glass, asset value. We can see it, but we may not be able to touch it for years. The key, in our opinion, is for Radio One to generate enough internal liquidity across a likely time divide,” the analysts told clients.
Calling them “near-distressed bonds,” Cheen and Hebert noted that the bonds have been fighting back from an early February trading low of 65% of face value, more recently trading at 77%. At that level the current yield is 19.49% and the analysts reiterated their “outperform” rating, saying Radio One should have enough cash and EBITDA to service its debt load.
By the way, Radio One’s $386 million senior term loan B due 2016 has been trading among institutional investors at 97% of face value with a current yield of 8.11%. As you would expect, it ranks ahead of the PIK notes for repayment.
But don’t look for the company to be able to recapitalize anytime soon.
“Radio One has enacted various recapitalizations during the past 15 months that have extended maturities through 2016. The 12.5%/15% bonds are callable at 103, but we do not think the company will be able to move on a take out until it has deleveraged another two or three turns on attributable EBITDA. With free cash flow still likely to be only about 15% of EBITDA this year, we suspect it may be a few years before the company could be capable of extending the estimated $675 million stack of maturities it faces in 2016,” Cheen and Hebert wrote.
RBR-TVBR observation: Alfred Liggins grew up in the radio business, which has served him well. But it’s a good thing that he took the time to earn an MBA from the Wharton School of Business at the University of Pennsylvania to also have the financial training to navigate the tough financial seas recently encountered by the company his mother founded.
