The issue of whether a broadcast license can be used as collateral is a huge one. It appeared to have been settled in the 1990s by a series of court decisions that effectively separated “an interest in proceeds and an interest in the license itself.” But recently some courts have taken a different stance, expressly rejecting this application of the bankruptcy laws by adopting the former court rulings.
While there’s no question that a broadcast license is valuable, the topic can get trickier when a broadcast company wants to use that value as collateral for a loan. Dow Lohnes PLLC’s John Logan, Christina Burrow and Timothy Kelley explain the history of this issue and the mounting attacks against what they call a “period of détente.”
As you can imagine, the issue of whether a broadcast license can be used as collateral is a huge one. As the Dow Lohnes attorneys point out, FCC licenses “generally are the most valuable assets of a broadcast station, and uncertainty as to whether a lender can rely upon that value as collateral affects the willingness of secured lenders to finance broadcasters.”
At the heart of the matter is a consistent FCC position that lenders may not take a lien on broadcast licenses. As our legal experts explain: “The agency based this policy both on prohibitions in the Communications Act against holding a property interest in the radio spectrum and on policy concerns that liens on licenses would undermine the independence and discretion of FCC licensees and infringe upon the commission’s responsibility to approve transfers and assignments of licenses.”
The issue appeared to have been settled in the 1990s by a series of court decisions that effectively separated “an interest in proceeds and an interest in the license itself.” As a result of these rulings — and the FCC’s approval as indicated by its modification of transfer and application forms to add an acknowledgment of liens on the proceeds of the sale of an FCC license — broadcasters set up “license-only subsidiaries” that “relied upon assets held elsewhere in the borrower’s structure to operate the broadcast stations.” Lenders would have a security interest in the proceeds from the sale of the license rather than in the license itself. It’s a fine point to my mind, but a significant legal distinction.
Recently, some courts have taken a different stance on the proceeds-interest concept. These challenges include a bankruptcy court case where the court relied upon Section 552 of the Bankruptcy Code to conclude that “proceeds from the sale of a license, as property acquired by the debtor after the commencement of the bankruptcy case, are not subject to any lien granted in a security agreement that the debtor entered before the commencement of the case.”
Meanwhile, a different bankruptcy court has expressly rejected this application of the bankruptcy laws by adopting the former court rulings. Instead, it decided that “the economic value of an FCC license attached prior to bankruptcy was not barred by Section 552 of the Bankruptcy Code, even in the absence of a sale agreement or FCC approval,” according to the experts.
These conflicting bankruptcy court decisions have added a layer of uncertainly by interjecting bankruptcy court laws into the matter. As the attorneys explain: “The current uncertainties about the validity of properly limited security interests in the value of FCC licenses now arise not from the FCC and the Communications Act but from the courts and the Bankruptcy Code.“ As a result, they warn that a pending decision by an appeals court could “supplant what until now has appeared to be a settled nationwide approach of permitting a proceeds security interest in FCC licenses.”
A change in the policy would also, as our experts point out, “make it much harder for broadcasters to secure the funds they need to expand or, in some instances, to survive.” That’s not good news to anyone already dealing with the double whammy from the Great Recession and increased competition for advertising dollars.
More information about this issue and cases in question may be found in an article entitled “Unlocking the Value” that appears in the March-April issue of MFM’s The Financial Manager magazine. An electronic copy of the magazine is currently available on our website (www.mediafinance.org); I encourage you to give it a read. This brief recap doesn’t do justice to the full text of their work; the subject is one that directly affects our companies and industry. I also want you to know that any mistakes I made in this recap are mine alone; I apologize in advance to our experts.
With implications at stake in the bankruptcy cases currently under appeal, the latest developments affecting FCC license values will certainly number among the topics being discussed at Media Finance Focus 2012, the 52nd annual conference for MFM and its BCCA subsidiary. This year’s conference will be held in Las Vegas on May 21-23; we hope you can join us. As our members can attest, the MFM-BCCA conference delivers a tremendous tangible value to them and the companies they represent. You can bank on it.
Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary. Her column appears in TVNewsCheck every other week.You can read her earlier columns here.