Posted by: hdemott | April 20, 2010

Think There’s No Such Thing As A Free Lunch? Then You’re Not a Debt Investor

Yesterday I ate at the W Hotel on Lexington Avenue.

Today it is the Four Seasons Hotel on 57th Street

Tomorrow, its the other 4 Seasons – on Park.

Think there’s no such thing as a free lunch? Then you are not a high yield debt investor in the media space.

With money market rates hovering around zero investors have throw caution to the wind in search of yield.

“What are the company’s long term prospects?” has been replaced by “Is it going bankrupt this year – and if not – what’s the yield?”

Right now we are int he television refinancing business. Broadcast TV is by all rights a long term declining business – particularly at the affiliate level. The only question is what is the slope of the decline – and how levered are the underlying companies.

With more and more media pressing consumers all the time, it is harder and harder to aggregate audiences. When you do aggregate an audience – a large percentage of that audience is watching on DVR’s – i.e. not watching commercials. If you are an affiliate you are at war with the cable company over retransmission consent (where you are winning) but also fighting your network who wants most of those payments (and here you are losing). Internet broadcasting promulgated by the networks (see Hulu, TV Everywhere etc…) is also eating into your ability to have a future. And you are fighting all of these battles with the weight of 6-8 turns of leveraged tied to your ankles. Life for an affiliate is tough

Despite this, and due in some large part to ridiculously easy comparables from last year, affiliate revenues and cash flows are looking up sharply this year. Couple this with a ravenous appetite for yield and you have a recipe to a host of free roadshow lunches.

Currently, I have eaten free lunches courtesy of Lin Television, Sinclair Broadcasting, Nexstar, Allbritton, Gray Television (today) – and I have excluded Lamar Advertising – which I missed.

In almost all of these cases – the companies have amended and extended credit agreements – and paid down bank debt with new high yield notes – pushing out maturities well into the future.

A year ago – all of these company’s high yield notes traded in the 40’s – their bank debt traded in the 60’s and the equities were pure options (generally under $1). Fast forward and I am eating steak lunches while being asked to lend money at 8% for a company levered at 6X this years EBITDA (and 2010 is going to be a heck of  a lot better than 2011).

This cycle of amend, extend, pretend and have a chicken lunch is being played out across all sorts of industries keeping alive the equity holders hope – and certainly allowing management teams to continue plugging away.

The scary thing – is not that the free lunch is back – but that the free lunch is subsidizing more of the same from these companies. You hear the same platitudes (local is important – our local news is #1 – retransmission revenues will continue to rise – etc…) over and over – and few of these guys actually are talking about the forces that are disrupting their business and spending to do something about them.

Yes they will certainly last another 5-8 years – the lunches have bought them a lot of breathing room – but unless they want the next round of lunches to be served at restructuring advisers offices (where they serve turkey sandwiches – no chips) they had better figure out how to aarrest their fall beyond just doing the financial engineering necessary to stay alive.

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