Advertiser Bankruptcies: Don’t Get Stuck

My recent columns about bad debt and the role of DSO (days sales outstanding) in forecasting ad revenue wouldn’t be complete without addressing one of the greatest challenges to collecting outstanding ad revenue: a customer that files for bankruptcy.

Like the proverbial half-full/half-empty glass, protection of the bankruptcy court can be a beautiful thing or a travesty. On the plus side, there have been instances when it has allowed a highly leveraged broadcaster the opportunity to remain on the air until it could restructure its debt or sell its license.

On the half-empty side, there have also been numerous instances when a station has stood in line behind other creditors and settled for pennies on the dollar. While bankruptcies resulting from the current market conditions for oil and gas companies might be expected, recent filings by major brands like Sports Authority, American Apparel and Quiznos are an all-too tangible reminder that companies can get into financial trouble even when their business sectors are performing well.

Understand The Warning Signs

So how can companies avoid being left holding an empty bag when an advertiser or agency files for bankruptcy? The best defense is a good offense: identify organizations potentially in financial trouble and take the necessary precautions to reduce the risk of a huge write-off.

In an article entitled, Spotting the Sinking Ships, bankruptcy law experts Bruce S. Nathan, Kenneth A. Rosen, and Scott Cargill at the law firm Lowenstein Sandler LLP shared a number of tips for spotting the warning signs. The article is included as part of a special report on credit & collections in the March/April issue of MFM-BCCA’s The Financial Manager (TFM) magazine. Following are some of the warning signs they identified:

• Monitor financial statements for signs of reduced sales, declining margins, substantial losses that are increasing, and a reduction in cash.
• Pay particular attention to clients with large interest, principal or loan payments due — or some combination of the three — in the near future.
• Is there declining availability under a customer’s revolving credit facility, or has the customer chosen to issue new debt rather than paying its interest obligations with cash?
• A customer’s breach of a loan covenant; entry into a forbearance agreement with its lender, and/or payment of default interest and fees are additional red flags.
• Be wary of the unanticipated resignation or firing of a CEO or CFO, the appointment of executives and board members with insolvency experience, or firms that hire a law firm or financial advisor known for its bankruptcy expertise.

Know Where To Look

The experts from Lowenstein Sandler say uncovering these possible clues isn’t as hard as it may seem. In today’s connected world, there are a number of online databases containing this information. They include:

• Internet search engines like Google Alerts. They can send email notifications concerning new Web pages, news articles or blog postings about the client.

• SEC filings by companies with publicly traded securities. They contain information about the company’s financial performance including audited financial statements as well as the management’s assessment of future opportunities and challenges for the business. A customer’s failure to file a timely report should also be considered a sign of financial distress.

• The “investor” section of a company’s website. It often features company newsletters, press releases, announcements of SEC filings, investor earnings teleconferences and transcripts, stock-price information and financial statements.

• Uniform Commercial Code (UCC) filings as well as federal and state law tax lien filings against a customer. UCC filings may disclose that another creditor is concerned about its ability to collect claims or reveal a new lending relationship that further encumbers the customer’s assets. Likewise, filings against the company related to delinquent taxes and/or collection lawsuits commenced by other creditors are additional red flags.

• Credit rating agencies, such as Moody’s, Fitch Ratings and Standard & Poor’s. They analyze a customer’s probability of defaulting on its obligations. There are also propriety subscription-based businesses that specifically track financially distressed companies and industries, including Debtwire, S&P Capital IQ, Daily Bankruptcy Review, Thomson Reuter and Markit.

• Credit reports from BCCA. The media industry’s credit association has a database of custom reports on more than 40,000 advertisers and agencies. BCCA’s Commercial Credit Report (CCR) includes UCC filings, tax liens, and judgements. Additionally, its new Media Whys credit report provides a credit score based on industry-specific aging combined with trade data from Experian or D+B along with UCC filings, tax liens, and judgements. Some BCCA packages include the ability to track a portfolio of credit clients.
    
• You can also consider requiring customers to periodically provide financial statements and supporting information. Not surprisingly, Nathan, Rosen and Cargill note that “A financially distressed customer is likely to resist such requests.”

Take the Necessary Precautions

When signs point toward bankruptcy, the authors recommend taking steps to reduce your risk:

• Require cash payment. “Creditors that are not required by contract to continue doing business with a customer can switch to cash in advance or more restricted credit terms.”
• Modify terms of your credit agreement. “Service providers have recourse to various state law creditor remedies to permissibly modify credit terms contained in their existing contracts, or obtain other assurances of payment when a creditor has a reasonable belief, based in part upon existing warning signs, that the customer will be unable to perform under its contract.”

The authors note that some states have adopted the Restatement (Second) of Contracts, which is a legal treatise that summarizes and explains the current state of contract law in the United States. Sections of this law “allow a creditor to demand ‘adequate assurance’ that a customer is able to continue to perform under a contract when its financial health is in doubt.” The experts say courts in states that have not adopted the Restatement’s rules have been known to provide similar protections to creditors.

Consult The Experts

Media providers would be well advised to work with their legal counsel on these negotiations. Creditors that haven’t agreed to modify their credit terms “can sue for breach of contract or for violation of the automatic stay where its customer has filed bankruptcy.”

Your research will also come in very handy once the courts are involved. This documentation can be used to justify a demand for “adequate assurance” based on concerns about the customer’s ability to pay its indebtedness.

For additional insights on “Spotting the Sinking Ships,” you can read an electronic copy of the article in The Financial Manager using the link on our website; it will be available until early May.

Lowenstein Sandler‘s Bruce Nathan will also be joining bankruptcy law expert Wanda Borges, who represents a number of media organizations, in discussing “Current Hot Bankruptcy Issues Facing Trade Creditors and the Future of Chapter 11” at MFM’s upcoming Media Finance Focus 2016 conference, being held in Denver May 23-25.

Thanks to experts from all aspects of the media business, this year’s conference will provide “An Avalanche of Knowledge, Networking and New Ideas.” You can learn more about our lineup of speakers and sessions by visiting the conference website, www.mediafinancefocus.org.

As the Lowenstein Sandler experts conclude in their article: “Successfully identifying warning signs of a customer in financial distress and quickly reacting could be the difference between collecting a receivable or suffering a significant loss in the event the customer files for bankruptcy or other insolvency relief.”

After all, being left holding that (empty) bag is no laughing matter, April Fool or not.

Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary. She can be reached at [email protected]. Her column appears in TVNewsCheck every other week. You can read her earlier columns here.