Is Clear Channel's Borrowing Troublesome?
February 11, 2009 at 6:30 AM (PT)
Just like everyone else who wracked up lots of loans when the banks were giving cash with almost no strings attached, big media has a debt hangover, writes PETER KAFKA in his MEDIA MEMO.
CLEAR CHANNEL, whose private equity owners took on $17 billion in debt to acquire it last year, is getting hammered by investors who think it won’t be able to pay that money back, he writes. Next up for scrutiny: CBS, which has a big debt payment due next year and not that much cash on hand.
The WSJ outlines CLEAR CHANNEL’s situation: The company’s debt is trading at pennies on the dollar because investors worry that its radio and billboard businesses won’t generate enough cash to satisfy certain loan covenants, which would then jack up the rates on the existing debt. The company tapped a credit line on MONDAY (NET NEWS 2/10), but that’s not making anyone feel more comfortable:
This is standing accounting practices upside down. Borrowing does not increase cash flow. Borrowing increases debt on which interest has to be paid.
Drawing down the remaining $1.6 billion in its $2 billion credit facility injects more cash into the struggling company’s balance sheet, but the move has analysts wondering whether CLEAR CHANNEL may be choosing to access those funds now for fear it won’t be able to later.
Former broadcaster and past Chairman of the Radio Board of the NAB ROBERT L. FOX, told ALL ACCESS, "This is standing accounting practices upside down. Borrowing does not increase cash flow. Borrowing increases debt on which interest has to be paid. In this case, borrowing provides additional cash in order to pay interest and meet overhead. But as indicated it comes with a cost. The amount borrowed will probably cost more than $100 million per year in interest payments. Indications are that the company is in trouble."
If the debt ratio worsens rapidly over the next few quarters, eventually hitting 9.5 or more, debtholders have the right to ask for higher interest payments or other fees from CLEAR CHANNEL, writes KAFKA. They also could demand their funds back immediately, potentially sending the company into bankruptcy proceedings.
No one is mentioning the B word in connection with CBS, but BARCLAYS analyst SCOTT SHIFFMAN, in a note published last week, does make ominous sounds (title of his report: "CBS -- The Slippery Slope Has Begun"). The gist: CBS has a $1.6 billion bond that matures next year, and about $500 million on cash on hand. In order to make that payment, the broadcaster has several unappealing choices, including cutting its dividend or drawing down a revolver loan.
Any of those options, SHIFFMAN argues, in conjunction with a weakened TV business, could prompt the newly vigilant credit rating agencies to downgrade CBS’ debt below investment grade -- ie, junk. S&P may be the first to make a call, perhaps by the end of the month, he says.