As Wall Street's meltdown this month casts a dark shadow across the U.S. economy, the impact within TV media could be profound. In particular, the hundreds of broadcast TV stations purchased in debt-heavy transactions by private equity investors face the additional worry of making steep interest payments, on top of the traditional pain of a soft advertising climate.
Moody's Investors Service senior VP of media, entertainment and sports Neil Begley believes the downdraft could be the most difficult for media since the nasty recession of the early 1990s. Begley also talks to B&C's Robert Marich about why 2008 may be a “last hurrah” for broadcasters for a while, how cable systems look healthy despite the present difficulties, and the outlook for basic cable.
What's the impact of Wall Street's credit crunch on the media business?
Americans are hearing and reading words like “recession” and “depression.” That makes for a significant loss of consumer confidence and reduced spending. Broadcasters, newspapers and other media companies heavily tied to consumer spending and advertising are exposed. Even the Internet is clearly exposed here.
Local stations seem particularly troubled. Why?
Local broadcast stations have already experienced a tremendous weakening in the local economy because of problems in the automotive category; we're expecting things to get a lot worse there. There aren't many people on Wall Street who were around during the last real consumer recession in 1991-1992. We've had sharp economic pullbacks since then, but [unlike this one] those weren't consumer-led. In local markets, some of the advertisers don't just pull back, they go out of business.
What's the prognosis for private equity investors that bought stations in debt-heavy deals?
They are ill prepared to deal with the downturn from a liquidity standpoint. Lower consumer spending from the recent credit crisis could be the final nail in the coffin for the most [debt-heavy] companies. They've already squeezed all the efficiencies they can out of their stations.
But aren't those private equity purchases of TV stations solid because loans are multi-year facilities with full repayment scheduled years out?
Good question. The reason that the default rate is still low right now is that a lot of those transactions are what we call “covenant light” transactions. They have features like PIK toggles [making interest payments by adding more to debt] where borrowers could delay cash payments for certain classes of securities.
In the past, banks could cut them off before it got too bad. Within the next 12 to 24 months, we think you could start seeing defaults ramp up.
What's the outlook for the broadcast networks?
We have a “stable” outlook on broadcast networks, though it's weakening. It's surprising to us, in fact, that they held up so well through the upfronts and the current scatter market. But we are concerned this could be a last hurrah for a while. A lot of buys could have already been done because of the Olympics and elections. On top of that, you've now got tremendous pressure from lost consumer confidence. So for the broadcast networks, our view is that '09 will be a much tougher year for them.
How will cable system operators fare in this consumer downturn?
We have said this is the golden age for cable, and a lot of that is just good luck. They were forced to rebuild their networks to compete with satellite TV. That put cable in position to add high-speed data and phone piggybacked on that. These have much higher profit margins because you don't have high TV programming expenses. The triple-play bundle is a great value to consumers, and that falls into where the economy is right now. We don't expect a pullback on the bundle. Having said that, some consumers won't be able to afford premium channels, and there will be an impact there.
What's the outlook for basic cable?
Their carriage fees with long-term contracts, generally with escalators built in, offer a tremendous amount of stability. The average is 40%-60% of their revenue. They also tend to have lower rate cards than broadcast TV and therefore could be attractive to some advertisers. They are now competing with broadcast networks with original programming and taking some sports rights. This is the new world.