A number of TV station groups are feeling the pressure of being caught between the rock of strained liquidity and the hard place of excessive leverage. Nexstar, Gray, Allbritton, Barrington, Newport and Ion Media are among those whose falling revenue and cash flows are placing them at risk of breaching loan agreements.
The only surprise about Young Broadcasting’s bankruptcy filing last month is that it didn’t happen sooner.
It was that outrageously pricey $823 million purchase of KRON San Francisco that ultimately doomed Young.
But the underlying issues — strained liquidity and excessive leverage — threaten other TV station groups.
Among those are Nexstar, Gray, Allbritton, Barrington, Newport and Ion Media, according to analyst reports from Wachovia, Moody’s and SNL Kagan.
Each carries leverage ratios — typically, debt divided by EBITDA — hefty enough to earn them debt-rating downgrades in recent months and put them in jeopardy of breaching loan covenants, the analysts say.
That doesn’t mean they’re at risk of bankruptcy — yet. Most are still generating enough cash to make interest payments and broken covenants can be fixed.
But the economic downturn is taking bigger and bigger bites out of TV stations’ revenue and cash flows. And as they fall, debt leverage ratios ratchet higher. The higher the ratios climb, the more at risk companies are for covenant breaches.
“In most earnings call, particularly for [broadcast TV] pure plays, covenant violations have been the focus,” says Justin Nielson, an analyst at SNL Kagan. “Banks are getting more stringent on some of these covenants.”
A recent report from Wachovia’s Bishop Cheen puts Nexstar at high risk of violating a covenant to maintain a leverage ratio no higher than 6.5. Nexstar could violate that covenant as soon as the end of this month, according to the report.
Nexstar last week acted to avoid such a breach and improve liquidity. The company is offering to swap $143.6 million in 7 percent senior subordinated notes due 2014 for an equal amount of PIK (payment in kind) notes.
The deal would help Nexstar maintain liquidity because it suspends cash interest payments on the debt from July 15, 2009, to Jan. 15, 2011. Instead, interest would accrue during that period.
Also, during those 18 months, the $143.6 million in debt would effectively be removed from covenant compliance, theoretically buying Nexstar time to weather the downturn.
Perry Sook, Nexstar’s president and CEO, declined to comment, saying the company is in a quiet period leading up to tomorrow’s announcement of financial results for 2008 and its fourth quarter.
The Wachovia report doesn’t include Gray, but the Moody’s and SNL Kagan reports do and they put it in roughly the same category with Nexstar.
“Both have leverage and liquidity issues and the potential for covenant breaches,” says Moody’s analyst Neil Begley. “They’re among the companies we will be looking at in terms of covenants and liquidity.”
Gray is OK for now, says President and COO Robert Prather. “I don’t think we’ll have any violations in the first quarter,” he says. “That totally depends on the economy, our revenue and profits.”
Prather disputed the 8.1 leverage ratio for the last 12 months cited in the SNL Kagan report, but did not say what the leverage is. The current ratio won’t be known until Gray reports first-quarter results, probably in late March or early April.
“We don’t intend to violate any covenants,” Prather says. “If we were getting close we would work with banks to get an amendment.” Gray’s not in talks with its banks at the moment, he adds.
Representatives at Allbritton, Barrington, Ion, LIN and Newport did not respond to requests for comments by deadline.
Covenant breaches don’t directly translate into bankruptcy and can be resolved.
“If a company is in covenant default, it can either cure the default, the lender waives the covenant or amends the covenant,” says John Brooks, managing director of the Media Finance Team at Wells Fargo.
Cures may take the form of transforming debt into equity, thus giving creditors an ownership stake in the company, or de-levering — somehow reducing debt. In effect, companies negotiate with lenders to do whatever it takes to get the company back into covenant compliance.
Covenant waivers or amendments come at a cost — typically, higher interest rates.
“Some [banks] are getting 15 percent terms,” says Nielson. “Interest expense is going to hinder lot of these station groups if they have to restructure that way.”
Several publicly traded broadcast groups have suspended dividends in an effort to prop up liquidity. They include Hearst-Argyle Televsion, Sinclair and Belo.
Belo this week announced that, in addition to suspending dividend payments after the second quarter, it was reducing a bank credit facility from $600 million to $550 million and renegotiating key covenants.
Although Belo benefits from the moves — less debt, more liquidity, temporarily relaxed covenants — it’s paying for the flexibility: fees of up to 0.5 percent annually on the unused money in the credit facility.
“Belo was in compliance with the terms of its bank facility, but we proactively entered into this amendment to provide the company with additional capacity under the agreement’s leverage and interest coverage covenants,” said CEO Dunia Shive in a statement.
The broadcast sector historically has been highly levered. It’s the recession’s impact on revenues and cash flow that has magnified financial strain.
Few companies escaped debt rating downgrades in Moody’s latest action. Those that did include Hearst-Argyle, Fisher Communications and Bonten Media.
Faced with their own credit crunch, banks are more likely to hold borrowers’ feet to the fire in the current economy.
“Lenders feel a much greater sense of urgency,” Brooks says.
Leverage covenants typically were around 8.5 times cash flow two years ago, a recent pinnacle for station deals, he says.
“Now, because of the way 2009 is shaping up, some of these deals are now at nine times cash flow and they’re not worth that today. The mindset is you’re that much more anxious to use a covenant violation to argue for reduction in debt. We have to deal with a broken covenant one way or the other,” Brooks says. “We’re chartered as stewards of the parent company’s money.”
But Brooks says that filing for bankruptcy protection is the last resort. “The only people who win in bankruptcy are bankruptcy lawyers.”
Others contend bankruptcy may be the best tool available to some companies.
In better times, a publicly traded company might be able to sell stock to raise money to buy down debt and bring leverage ratios in line with loan covenants.
But that’s an option not available to the troubled publicly traded station groups.
No longer seeing any upside in the station business, Wall Street has virtually abandoned it. The stock prices of Nexstar, Gray and LIN have sunk below $1.
“Once the stock falls below $1, it’s the old roach motel thing — you don’t come back,” says one longtime industry source. “I don’t see them ever climbing out of penny-stock territory.”
In the past year, a number of prominent broadcast groups have opted for bankruptcy. Along with Young, the most recent that have sought the courts’ help in starting over include Tribune, Pappas, Equity Media, Multicultural and Johnson Broadcasting.
Whether other highly leveraged broadcast groups follow will depend on not only on the economy, but on their financial dexterity.