Media Cos. Hit With Double Whammy

If Lennon and McCartney were to write "A Day in the Life" today, they might need to change the words to, "I wanted to read the news today, oh boy, but my paper stopped coming."

Certainly, the decline of the American newspaper is no secret, but media and entertainment companies in general-from television and radio broadcasters to publishers to media business services-face a bleak 2009. Many are over-levered, with poor free cash flow, and while only a handful have substantial debt maturities this year (see charts below), analysts predict we will see a multitude of covenant violations and interest payment defaults.

As one analyst put it, they may not have big maturities coming due, but if these companies don't have any cash, even a small maturity can feel immense if they can't access the capital markets.

Case in point, cable company Charter Communications and television station owner Young Broadcasting both missed mid-January interest payments on their bonds. Charter's payments totaled $73.7 million; Young chose to forego a $6.125 million payment due on its 8.75% senior notes to preserve liquidity. Meanwhile, Cygnus Business Media, a business-to-business media company, failed to repay its revolver and delayed-draw term loan, when they matured on Jan. 13.

The problem for the media sector is two-fold-part cyclical, part secular, or, part recession-driven advertising drought and part declining business model. And it depends both on what a company does and the amount of cash it has on hand as to whether it will survive the coming year or two.

For example, Tribune already filed for bankruptcy, and other newspaper publishers could be headed that way. "Where print publishing is concerned there is secular pressure, compounded by cyclical pressure," said Neil Begley, a senior analyst at Moody's Investors Service. "And a lot of it may not come back with the rebound. For other traditional media, broadcasting, for example, it's mostly cyclical. And it will come back."

But will the company be around when it does? In a downturn this severe, even companies with a relatively safe future can fall victim to cyclical forces.

To illustrate what media companies are up against: For U.S. based speculative-grade issuers, Moody's foresees the default rate jumping to 15.3% at the end of 2009; for the media sector, including broadcasting and subscription, the rating agency projects a default rate of roughly 23%.

"Unfortunately, if you've got a lot of leverage going into a cycle like this, [your business model] doesn't really matter," Begley said. "The thing that matters is that you have a lot of cash, and covenants with a lot of room under them, that can take you at least through 2009, hopefully 2010. ... Not all recessions are created equal for media companies, and consumer-led downturns are particularly harsh." Broadcasters especially have high fixed costs, he added, and if they lose a dollar of revenue, it's possible that 70% to 85% of that could flow through to Ebitda.

In the case of Young Broadcasting, for example, analyst Shelly Lombard of GimmeCredit wrote that the company has valuable television station assets. "In an ordinary environment, the company would have been able to file bankruptcy and do an orderly liquidation of its assets, resulting in a decent recovery for bondholders. But in the current environment ... bank debt may even be impaired." GimmeCredit estimates that Young has enough liquidity to last until mid-2009.

One example of a company that might appear to have a bright future is Sirius XM Radio, now the only U.S. satellite radio company following Sirius's acquisition of XM in July 2008. However, rating agencies have expressed concern over the company's ability to refinance the $960 million in debt it has coming due this year.

Another company that could see some trouble is Clear Channel, which has a $500 million bond maturity coming due in May. That amount is not foreboding, analysts say, but it will likely have to be negotiated with lenders, because Clear Channel is not in the kind of financial shape it takes to get a deal done in today's market.

Clear Channel's industry was producing free cash flow and margins, but the company piled on a lot of debt, way too much debt, when it was bought by Bain Capital and THLfor $27.5 billion. And now that radio advertising has declined, that leverage has become a problem.