Las Vegas (NAB) in the Rear View Mirror

Following a number of meetings with lenders, investors, and broadcasters during the NAB Show, let me share some thoughts and observations.

While overall attendance was down, the Media Services Group suite was very busy. Despite fewer pre-set appointments than usual, we filled two full days of meetings with broadcast station owners, potential buyers, and members of the financial community. My partners and I now have a much better perspective on marketplace conditions than we did prior to the convention.

At present, the trading market is virtually locked up (with the exception of some small market sellers who are willing to seller finance their deals). We have buyers and we have sellers. But there is no credit to finance the transactions; therefore, there are precious few transactions. The logjam will not break until credit returns to the industry.

With so few transactions, station pricing is a guess at best. We believe that if there was liquidity in the marketplace, stations would change hands in the range of 5x to 8x broadcast cash flow. But this is based on anecdotal evidence; there are really no data points to rely on at present.

Mike Andres of BIA predicted an unprecedented number of broadcast loan defaults this year. I believe that most broadcast loans are either already in default or will be in default by the end of the year (though some loans have been renegotiated with relief extended nine to twelve months).

Media Services Group expects a number of engagements in the coming months assisting borrowers and lenders in the restructuring of many of these problem loans. Look for a lot of debt being converted to equity. There will likely be some liquidations. While this will be a long and painful process, solid broadcast companies should emerge at the end with balance sheets and debt structures favorable to future growth.

We also believe that a number of funds specializing in distressed debt will be negotiating with the banks to buy broadcasters’ paper at deep discounts. It could provide them with a cheap entry into the broadcast space and generate significant returns once the business regains its footing. However, holders of existing equity, beware.

Bottom line: very stormy seas ahead with smooth sailing ahead for those companies able to stay afloat until the storm passes. This will be a much longer and deeper problem than the one many of us suffered in the early 90’s. Now is a great time to assemble your team to help navigate the tempest. It will soon be time for “all hands on deck.”

Those are my thoughts . . . what are yours?

George Reed
Media Services Group

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

We've Seen This Movie Before

Credit is frozen. Bankruptcies are increasing. Everyone's in workout. Business is horrible. There's genuine fear that the broadcasting business, particularly radio, is over.

1991 - 1992