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— Backstory —
Although you wouldn't know it from their stock prices, most media and entertainment companies are well-positioned to weather the credit crisis. One reason is luck. Or so Fitch Ratings acknowledges in its recent report, "Liquidity Focus: Media & Entertainment," by noting the sector had "no significant exposure in bank facility commitments" from Lehman Brothers Holdings Inc. Fortunate, too, is what Fitch calls "limited overlap" on credit facilities that M&E companies obtained from shotgun-wed Wachovia Corp. and Citigroup Inc. This suggests minimal diminution, if any, when these facilities come up for refinancing. The same is true, Fitch goes on to report, of facilities obtained from hastily merged Merrill Lynch & Co. and Bank of America Corp. More comforting, however, are industry characteristics. Solid revenue streams, wide margins, discretionary capital spending and modest working-capital needs more often than not deliver internally generated liquidity of a sort other industries can only envy.
Fitch knows the exceptions, citing a "weak operating liquidity" category within M&E that consists of AMC Entertainment Holdings Inc., McClatchy Co., Regal Entertainment Group, R.H. Donnelley Corp., Six Flags Inc., Tribune Co. and Univision Communications Inc. But it also knows these exceptions suffer from "self-inflicted financial policy decisions, which have resulted in a significant portion of cash flows being dedicated to interest expense." Not all financial policy decisions have been off the mark. M&E companies deserve praise, collectively, for bolstering their balance sheets during credit-friendly climes from 2005 through the first half of 2007. So it is that, of the companies in Fitch's M&E portfolio, debt obligations that mature in 2008, 2009 and 2010 total a mere $28.8 billion. The maturity total compares with balance-sheet cash of $21 billion, cumulatively, and free cash flow in the latest 12 months of $18.1 billion. This, in turn, gives M&E internal liquidity of $39.1 billion, which indicates it's already hoarding a surplus -- now at $10.3 billion -- after accounting for maturity payments through 2010. Yet there are exceptions here, too. Six Flags has $287 million in a mandatorily convertible preferred stock due August 2009 and $141 million in senior unsecured notes due February 2010. But with Fitch's putting the theme-park outfit's total liquidity at $153 million (the sum of credit-facility availability, free cash flow, cash and cash equivalents), the rating agency's prognosis of "material refinancing risks" borders on understatement. Tribune, meanwhile, confronts debt maturities totaling $857 million next year. And that's after proceeds from the sale of Newsday is helping it meet obligations of $688 million this year. This is all the more reason for Tribune chairman and CEO Sam Zell to hope the Chicago Cubs' auction delivers on its $1 billion price. Fitch adds that Univision Communications has a $350 million loan due March 2009 but credits the Spanish-language broadcaster with having "alternatives in place to satisfy this maturity." These are said to include "cash on hand, marketable securities and noncore stations (Las Vegas, San Diego, etc.)." The latter, meaning the sale of noncore assets, is another characteristic that can serve M&E conglomerates well during downturns. Their asset collections tend to be easily divisible, as recently witnessed by CBS Corp.'s selling television stations and Walt Disney Co.'s auctioning off radio assets. So, depending on how the credit crisis plays out, deconsolidation could continue ad infinitum. Key to seeing M&E companies through this crisis are their credit facilities. And many were as diligent about exploiting the easy-credit days for relaxed covenants as they were about extending debt maturities. Hence, in one of Fitch's most reassuring analyses, we learn AMC Entertainment could lose 48.8% of its annualized Ebitda before tripping the covenant around which it has the least room to maneuver. R.H. Donnelley's Dex Media East Inc. and Six Flags could experience Ebitda declines of 43.5% and 35%, respectively, before doing the same. Only at the other end of the spectrum does it get scary. A 9.5% Ebitda decline at Warner Music Group Corp. would have breached its facility of $250 million -- on which it still has availability of $246 million -- before a recent dividend elimination has Fitch predicting "compliance with all of its financial covenants." But at Tribune, an 8% Ebitda decrease could trigger a trip. Richard Morgan covers media for The Deal. |
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