Radio's Four Bankruptcy Options

A day hardly goes by without news reports from radio groups that their business is tanking faster than anyone ever anticipated.

Take Cox and Emmis.

Both good companies. Run by solid radio execs.

Their quarterly revenues are down by a fourth.

Emmis is not far away from being in violation of its loan covenants – perhaps six to nine months. Just yesterday Standard & Poors lowered Emmis’ rating and proclaimed a negative outlook.

Cox revenues have declined substantially but the company still remains profitable. Bob Neil is another good operator and the Cox strategy has been to keep debt off the balance sheet – something most other consolidators have failed to do.

But all the personnel cuts in the world are not going to save Emmis from bankruptcy.

Or Citadel.

Or Cumulus.

Or (insert name) here.

So let’s take a realistic look at what’s really killing radio in light of the fact that most consolidated radio groups have run up more debt than they can repay – or as I call it – bankruptcy.

In the past this debt was managed by constant refinancing that banks were more than happy to provide because here in America financial institutions have defined prosperity as taking bailouts from the government, raising fees and telling everyone their own balance sheets are great.

The other thing the radio industry always had going for it is that it pumped out prolific amounts of free cash flow constantly.

The "refi" aspect was just another way to postpone the inevitable but it worked for consolidators and they gladly paid the price to banks to gain new terms and extensions.

But now, cash flow isn’t so good and radio groups are in real trouble.

Many, if not most of them are at risk of reneging on their loan covenants.

That could mean bankruptcy.

In the real world, bankruptcy means Chapter 11 or one of the other iterations that allow for companies to reorganize.

But, something interesting has developed.

No lender wants to take these radio stations back. In fact, not too many people want to buy them and the few who do are being restrained again by a financial system that sees lenders precluding their clients from acquiring new properties. Thus, the marketplace has been shut down.

For folks who are still working in commercial radio, the big question is when will Regent or Citadel or even Emmis finally go belly up?


That’s right. Never.

No one wants the stations back.

They are worthless to lenders at pennies on the dollar especially in this economy and without the growth potential of the next generation. And if you are as surprised as many are to learn that radio stations are not a hot item, then you might also be surprised to learn that what the banks are doing is making it worse.

As I said at the outset, the real problem is radio’s inability to collect the money that it is owed by advertisers still running commercials on their air.

If they could reduce the growing delinquency rates, that cash could go a long way toward hanging on, keeping people employed or funding new initiatives that could be beneficial down the line.

Instead, their salespeople are losing commissions as clients, agencies and big advertisers are either greatly delaying or not paying for their schedules.

Seasoned radio pros will remind you that receivables tell you everything – it is the number one vital sign to a radio station’s health. And when advertisers don’t pay, salespeople take it in their shorts. They become demotivated in an already depressed economy. They become resentful when commissions are taken back or not paid for their hard work.

And you can’t blame Clear Channel, Cumulus, Citadel, Entercom, Radio One or anyone for that matter for slow pay or non-paying clients. The economy has created this bunch. The real question is whether stations should take a tougher stand.

The world has changed. And we in the radio industry don’t really like to look at the rest of the world. We have always liked ours better.

Just look at the national economy.

Bailout money being taken by banks that then keep the money, raise rates and brag about how their new balance sheets look.

If you think we have incompetent CEOs in radio, look to the banking and financial sector – a critical one for radio consolidators. They’ve got worse. These CEOs should be extricated from their powerful positions as Richard Wagoner was pushed out of General Motors.

The world is broken.

The financial systems are broken.

And as a result, the radio industry is broken.

You may hear a lot of speculation that the radio station acquisition market is showing some signs of life, but it can’t possibly be when major buyers are contractually prevented by their financiers from buying stations.

You may think that it will all pass as recessions do and everything will get better, but this isn’t a recession that’s plaguing the world and our world. It’s a depression.

We can only blame incompetent radio CEOs for so much – after all, they are the ones who ran up the debt that they now cannot pay.

But it is the financial system that is preventing a comeback.

Radio companies cannot and will not look to the digital future or make amends with the next generation when they cannot keep from defaulting on bank covenants.

So, here’s what you can expect going forward as straightforward as I can give it to you:

1. If there were value in radio stations owned by groups on the verge of default, they would be snapped up in a moment’s time. There isn’t and they won’t be.

2. Lenders can take the companies away from radio consolidators but truth to be told, they don’t want them. They don’t want to operate them. Here’s a scary thought: They can’t run, say, Citadel any better than Farid Suleman. Did you see the CEO of Thomas Lee on CNBC talking about the future of Clear Channel? He has no clue.

3. Groups can be allowed to convert this burdening debt to equity for their lenders, but that’s what many have already been doing all along to save their bacon. In some cases, the failing groups don’t have that much of the company to trade off in return for not making current debt payments.

4. Banks and financial institutions can relax their loan covenants – sneaking in some more fees and raising interest rates again – and perhaps let the owners buy their way out of this mess if and when things get better.

I think option number four is your outcome.

You’ll read and hear a lot about the fate of the radio industry in the months ahead, but I’m thinking that a group of lenders who don’t want to take back assets in a declining industry will have no other choice but to grin and bear it.

But it is not unfair to ask why our great industry got into this mess in the first place.

After all, some radio groups got it right.

Cox isn’t choking on debt.

Family-owned companies like Greater Media are just fine.

Bonneville, owned by the Mormon Church, was the last group left standing that paid big money for a radio station. It’s loaded with dough – and no debt.

Consolidators – ironically the ones enabled by the very financial institutions that are helping to take them down -- never imagined that they couldn’t manage burdensome debt because their stations always cranked out reliable and prodigious amounts of free cash flow. Who would have thought?

As we have said before, no Plan B was ever discussed. No Worst Case Scenario was necessary in a business this profitable.

Until now.

And, sadly, while their finances get drained and a new generation 80 million strong abandons traditional media, the radio industry finds itself in the precarious position of no longer having home field advantage.

Which means – radio’s fate is now out of its hands.

For those of you who would prefer to get Jerry's daily posts by email for free, please click here. IMPORTANT: First you must check your mail or spam filter to verify your subscription immediately after signing up before daily service can begin.
Thanks for forwarding my pieces to your friends and linking to your websites and boards.