A Look at Bankrupt Radio's Playbook

Regent missed a $1,269,125.73 payment to lenders, it was revealed yesterday.

Regent has been working with their lenders since last spring, but now the cash ran dry and Regent could neither pay any of the interest or principal due.

Regent also missed the payment of so-called professional fees and that has got to really irk their lenders. Don't mess with their fees.

What's interesting is that if Regent has been in default for nine months, it doesn't seem like the lenders want the company.

They may have no choice but to take it back, but if someone's not paying you in a timely fashion for that long and you're letting them get away with it, it illustrates the sorry state consolidators have gotten themselves into. Read Regent's SEC confessional here.

Regent stock is now worth just 19 cents a share. Regent execs are spinning it as an attempt to conserve cash.

Ya think?

Here's another nice mess Regent has gotten themselves into.

I thought it might be helpful to look behind the scenes at radio group bankruptcy plans now that Citadel and NextMedia have filed.

Regent was expected -- the vultures were circling the carcass for some time now.

And Regent won't be the last bankrupt radio group.

So, I thought I'd handicap the latest bankruptcy potential for radio group owners and at the same time try to provide a little context to what they may be thinking and hoping will happen:

1. You've probably noticed radio consolidators talking up a recovery -- even alluding to better performance than last year. They've somehow managed to confuse some of the loyal trade press into thinking the worst is over. The reality is that radio groups will be comparing 2010 with God awful revenue figures for 2009 so the losses will have to look better. But they would be fortunate to have one "plus" quarter even with the easy comparisons with last year.

2. All the CEOs have been nicely tucked into bed in advance of whatever should happen so you don't have to lose any sleep over it. Emmis recently rehired CEO Jeff Smulyan even though Emmis is a potential chapter 11 candidate. Lee & Bain have John Hogan tied up (God, that sounds good, doesn't it?) for the foreseeable future even though Clear Channel is nowhere near out of the woods. Lew Dickey took that huge long-term package a few years ago that was supposed to convince him to sign a new contract. Disingenuous at best. Fagreed Suleman was rewarded for so ably steering Citadel right into bankruptcy with a contract and job security with the lenders who took back the company. So rest well -- the CEOs have their money all tucked away in advance of whatever bankruptcy will bring.

3. Prepackaged bankruptcies are the new growth businesses for lenders. When bankrupt radio groups run out of money, they look to Fagreed Suleman for leadership -- how scary is that? The Citadel prepackaged bankruptcy lets the failed CEO negotiate to save his neck while giving up whatever pennies were going to go to shareholders. Bankruptcy courts just rubber stamp the deals and then within six to nine months allow the new owner/lender to work their way out of chapter 11. It's pure genius. Shareholders get wiped out. The original equity holders lose their stake (i.e., Forstmann Little of Citadel) and the banks get the company.

4. I saw an Inside Radio survey recently that said most radio people who responded feel their jobs are safe. The article said, "Half (51%) of the respondents to the Inside Radio reader survey expect the number of employees at their station or cluster will remain the same in the coming months — a far cry from a year ago when 56% were bracing for layoffs. While a quarter say that’s still possible in 2010, an optimistic 24% say it’s likely their station will actually begin to fill positions that have been vacant. Last year just 11% thought they’d see staff increases". I'm afraid that's more wishful thinking even if it is understandable.

5. There is only one thing ahead -- cutbacks.

6. There is only one thing that can be cut back -- jobs.

7. Most agency people believe advertisers will spend the same amount as last year -- and that was way down. However -- and this is very significant -- they will start to shift that "decreased" spend more to new media which has been growing even through the recession. Thus, the one thing radio groups teetering on the brink badly need -- more cash flow -- will elude them again this year. And, to make it worse, refer to number 6 above -- they are reducing their local sales staffs to save money. The imperfect storm.

8. Bankruptcy may be what we fear but it is a mercy killing for many of the failed CEOs who are out of luck, out of time and, of course, out of money. Bankruptcy is the only answer because it allows most if not all of their debt to be wiped out and with a prearranged bankruptcy, the lenders take control in an orderly way with the very CEO that got them into the mess running the new entity. As the old saying goes, "Better the devil you know than the devil you don't."

9. The end game (I know you've been waiting for this) isn't to stop the bleeding. Bankruptcy does that. A radio station really isn't that expensive to run especially with few people left and no personalities. The end game is to prune down the expenses even more and resell the stations as soon as the economy comes back. Notice how no one is rushing to buy radio stations in this economy even at under 5x cash flow -- way under.

10. Stations will start selling within one to three years and yes, the lenders will only get 3 times cash flow if they are lucky. And, yes buyers will be purchasing a lot of distressed properties with most of their assets (management, sales and talent) squandered. New media will continue to appeal to the younger audience now coming of age. Nevertheless, there will be some good money to be made by lenders when they sell these assets -- and remember, someone has to finance the deals (so guess who can hold the paper?).

My friends, when radio became all business and no show it was the death knell.

Not the economy.

Not the iPod (or even the iTablet when it comes).

Not Pandora.

This ending was guaranteed when suckers with big egos agreed to big interest payments based on unrealistic multiples (10 times or more) that lenders, oddly enough, never questioned.

Why didn't lenders in the early days of consolidation pressure these suckers to negotiate for true multiples of streaming cash flow?

Now we know, don't we?

Just as in Monopoly, the bank is never the one to go bankrupt.

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