June 25, 2009

Radio One and Emmis Staring at Bankruptcy

Here it is in Standard & Poor’s own chilling words:

• We believe that Radio One could violate its leverage financial covenant toward the end of the year if trends do not improve… We are lowering our rating on the company to 'CCC+' from 'B-'.

• The recovery rating on this debt remains unchanged at '3', indicating our expectation of meaningful (50% to 70%) recovery for lenders in the event of a payment default.

• Still, we are concerned that if trends don't meaningfully improve in the second half of the year, the company could violate covenants in the fourth quarter...

• Radio One may not be able to absorb a potentially significant increase in interest rates, as well as fees, which could accompany an amendment under current credit market conditions.

As an analyst put it, "radio bankruptcy club is getting a lot of members".

The real question for the rest – the people who are working at radio stations that may be ready to go under is – what is likely to happen?

As I said, bankruptcy can still be avoided, but the resulting time bought does not necessarily ensure the company’s return to solvency.

Here it is in real and simple terms.

Bankruptcy may not be automatic.

Creditors always have the option to re-negotiate.

But a covenant violation does tip the scales in the creditors’ favor at the negotiation table. They can severely restrict the company’s ability to manage its own cash, as we’re seeing with Citadel.

It gives the creditors greater influence in company affairs.

If you didn’t like the way Fagreed was running Citadel before, adding these additional creditors “two-cents” into the decision making process won’t be any better.

If you assume more firings and budget cutbacks, you would be assuming correctly.

Senior creditors can also take steps to protect their interests at the expense of junior creditors. The pecking order becomes apparent when resources become scarce.

Citadel is a good example of a company on a short leash with creditors.

Even if Citadel is lucky enough to find excess cash, it is now obligated to stash it into an escrow account for its creditors. That means fewer funds for capital expenditures and other operational needs. It bodes poorly for stockholders.

Even radio people severely burned by radio consolidators – fired, salaries cut, benefits dissipated, etc – can’t be enjoying watching Ebenezer Scrooge squirm so much.

The future of the radio industry hangs in the balance.

Consolidators have over-leveraged themselves.

They have participated in a system that rewards bankers by paying them fees – and these same bankers then get to turn the screws when their clients cannot generate enough cash flow to pay the interest back on their loans.

Radio boards are a joke.

The directors are wimpy. There is little oversight. Power grabbing schemes are in effect to allow failed CEOs to remain in power even as they fail over and over again.

I have hoped and wished for things to right themselves over the years.

Now, I’ve concluded that the best thing for the radio industry and its remaining employees is for these groups to fail.

And unpredictability might scare unsecured creditors in bankruptcy court, but it would certainly put hundreds if not thousands of radio stations back in the hands of people who love the business, know local radio and have a proven record of operating them.

Therefore, we’ve arrived at a time when bankruptcy may actually be the best option.