Thursday, April 16, 2009

Workouts: Two Perspectives

Much like the early 1990’s, “workout” is now a prominent term in the broadcasting industry vernacular. A workout refers to a non-performing loan which has been moved into a lender’s “workout” department for collection. The process is usually resolved in one of two ways: 1) the loan is restructured under more lenient terms, or 2) assets are sold to repay the outstanding debt.

As you might suspect, borrowers and lenders have two very different perspectives of the workout process. Without taking sides, I will attempt to present an overview.

Broadcasters

The broadcaster wants to restructure the loan(s) on terms which allow him to pay back the obligation from the business’ free cash flow. Generally, they want to buy time. This often means deferred payment terms, a lower interest rate, debt forgiveness, equity infusion, and possibly asset sales. An alternative (but a difficult one when credit is “frozen” as it is now) is to simply refinance the loan with a new lender.

The broadcaster takes the position that the current problems are a “bump in the road,” and given time, effort, and flexibility on the part of the lender, everything will work out just fine.

If the lender refuses to negotiate acceptable restructured terms, the war escalates. A Chapter 11 bankruptcy filing is in the broadcaster’s arsenal to stave off foreclosure (at least temporarily).


Lenders

Lenders simply want their money back. And they don’t much care how it happens. Ideally, they would like to see the borrower/broadcaster refinance their debt with a new institution. Failing that, they want the assets sold . . . immediately. If the broadcaster refuses to cooperate (in their view), the lender might take steps to have a receiver appointed, charging the receiver to liquidate the company.

If the lender believes that the problems are temporary, they may agree to restructure the note, generally collecting fees for the restructure agreement, and usually with provisions that they will be made “whole,” perhaps getting additonal security.

Lenders often (but not always) want to avoid the bankruptcy court. At times, they can negotiate a forbearance agreement with the borrower to agree to allow a receiver to be appointed, perhaps with the broadcaster’s agreement as to who the receiver will be.

And now, a word from our sponsor. The choice of a receiver is critical. The ideal receiver has M & A transaction experience as well as station operating expertise. That is a rare combination. You can probably count on one hand the number of firms serving the broadcasting industry who have that expertise (Media Services Group is one; Larry Patrick’s company is another). Unfortunately, a number of “consultants” hang out their shingles in every downturn; check the track records before hiring workout expertise.

Those are my thoughts, what are yours?

George