From Down And Almost Out To No. 1

In its rise to the top, Sinclair Broadcast Group has encountered a few speed bumps.

The biggest: A debt-fueled buying spree heading into the recession brought the company so close to a financial precipice that it was forced to look over the edge at bankruptcy.

Here’s what happened:

Sinclair’s off-balance sheet sidecar company, Cunningham Broadcasting, missed a loan payment and was in danger of missing another. A cross-default provision between Cunningham and Sinclair meant that if Cunningham defaulted, so did Sinclair.

Sinclair had the cash to make the payment but FCC rules prohibited Sinclair from doing that.

Already in danger of violating its own loan covenants, the possibility of Cunningham’s default exacerbated Sinclair’s own precarious financial position. Bankruptcy emerged as a possible scenario.

It was both a learning experience and a defining moment for Sinclair CEO David Smith. In a bit of gutsy brinkmanship, he reportedly told creditors breathing down his neck that he’d blow up both companies if they wouldn’t renegotiate Cunningham’s loan covenants.

It helped that nobody wanted to see the group crash and burn.

In the end, creditors granted Cunningham some covenant breathing room and the crisis was averted. It was then that Sinclair began its steady, deliberate walk back from the edge.

In hindsight, Smith acknowledges he would have done one thing differently in the years leading into the recession.

“I would have done longer term finance deals,” he says. “We had no financial issue. Our challenge was financial markets were closed at the moment when we had to refinance long-term debt. If you have half a billion dollars in bonds that have to be refinanced and the markets are closed and therefore it’s not refinanceable, therefore you declare bankruptcy.”

Since then, Sinclair has become the poster child for deals that de-lever.

So, despite a $3 billion-plus buying binge, Sinclair has kept debt-to-cash flow leverage not just in check, it has reduced it. Total leverage at the end of 2013’s third quarter was 3.97 times, compared to 4.27 times at the end of 2012. To put things in perspective, leverage at the end of 2009, a particularly tough year, was 5.49 times.

In perhaps the most striking sign of the turnaround, Sinclair’s stock, which traded for less than a dollar in the Great Recession’s dark days of 2009, now trades in the mid-$30 range.

Many, including Wells Fargo analyst Marci Ryvicker, see even more upside.

“At this point, [Sinclair] is the least expensive stock in the broadcast sector, trading at 7.6x 2013/2014 blended [free cash flow] per share,” she wrote in an early November 2013 update on the company. That compares to a peer average of 11.5 times free cash flow per share.

This story originally appeared in TVNewsCheck’s Executive Outlook, a quarterly print publication devoted to the future of broadcasting. Subscribe here.