Radio One and Emmis Staring at Bankruptcy

Radio consolidators are lining up for their long goodbye.

Clear Channel is teetering on the brink with lenders who are standing up to The Evil Empire’s demands for more favorable loan repayment terms. In the end the lenders will probably relent, but not before putting a scare into the entire radio industry.

To lose the number one radio group to bankruptcy would be terminal for the industry.

Citadel is the next best candidate for bankruptcy.

Its CEO, Farid “Fagreed” Suleman is a bean counter who understands that his role is to take care of business – and that does not necessarily mean effectively operating the group of Citadel and ABC stations he has assembled.

Citadel could file Chapter 11 in the next six to nine months.

Citadel may win a reprieve but it would likely be under even less favorable terms to repay their over-leveraged debt. So, that would be tantamount to a stay of execution.

Cumulus is sinking fast as well.

Local revenue can’t be generated quickly enough to pay the debt. As with the other groups the recession isn’t helping, but recessions happen. Cumulus apparently never factored that in when they paid big bucks for Susquehanna or tried to become one of the big boys.

As with the others, a stay of execution would be under draconian terms that could eventually lead to their bankruptcy.

And just yesterday, we see signs that two more radio groups are preparing for the worst case scenario.

The nuclear option.

Emmis withdrew its ratings from Standard & Poor's.

When Citadel did this recently, it was only weeks before they retained Lazard Freres to explore “strategic options” (which means no options) other than a Chapter 11 bankruptcy filing.

One analyst interpreted this as “another sign of acute financial distress on the part of Emmis, and a possible precursor to a filing, or even default event”.

An Emmis bankruptcy filing really stings because Emmis CEO Jeff Smulyan is one of radio’s good guys. He has a record of treating his employees well and has not been selfish about being a radio group operator.

Nonetheless, the pickle that the other consolidators have gotten themselves and our industry into, is affecting Jeff. His stations rely on a few large markets and business is really hurting in large radio markets.

His board wouldn’t let him take the company private in past attempts.

It’s too late now.

In addition, yesterday saw Radio One and Done (as I call them) put at high risk of default on their debt by Standard & Poor's.

Another symptom of the financial distress caused by the recession and resulting in advertising downturn is having on radio groups that owe too much debt.

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 written about the demise of radio from the earliest indications that occurred to me – back in 1996 when I never believed for one minute that the fast-growing radio groups could ever service their debt.

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

Maybe, Fagreed takes a powder and someone who knows how to operate radio stations gets to run the group (like any one of his ABC general managers or former managers).

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

Bankruptcy takes Clear Channel, for example, out of the hands of Lee & Bain and John Slogan Hogan and puts it in the unpredictable hands of a bankruptcy judge.

Why is unpredictability better than certainty?

Because consolidators are certainly killing off everything good about local radio to please their debt holders.

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.

Without overburdening debt.

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

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