As the credit crunch crimps plans for media companies, only the strongest are finding that they can tap the debt markets to fund their operations.
The recent wild swings in the financial markets underscore shaky investor confidence, which has also affected the market for corporate debt, where companies typically go for loans from investors to fund their operations or for an acquisition.
Selling pressure in recent weeks has caused interest rates for corporate debt to increase, making it less palatable for a potential borrower to raise money. Lately, the market has settled, but investors are only interested in lending money to companies with solid balance sheets and strong cash flow.
In the media sector, cable giant Comcast -- which earned $1.4 billion on $15 billion in revenue in the first half of the year -- proved to be fittest among the big cable companies. Not only was the company able to sell $3 billion in bonds last week, but it had investors knocking at its door to do so. The transaction received $6 billion in orders from investors, but there weren’t enough bonds to go around. That’s a good sign for the market in general and good news for other large cable or media companies that may need to access the debt market. Often when one company sees overwhelming demand for a peer, it will seize the opportunity.
“The advantage of having an investment grade credit rating is that you can access the market through any credit cycle,” says Mike Simonton, senior director of media and entertainment at Fitch Ratings. “Companies are returning and funding at levels that are pretty attractive.”
However, it is still difficult to raise debt for other media companies with questionable financial outlooks or deals tied to leveraged buyouts (LBOs), which tend to inflate company debt to levels that make investors nervous in times of economic uncertainty.
The market for these so-called high-yield” or junk deals has significantly weakened, leaving many companies out in the cold.
Both Tribune and Cablevision Systems, the fifth-largest cable operator in the country, have LBO-related financing needs.
Concerns regarding the Tribune deal stem from the heavy debt load of $8.4 billion that the company will take on as a result of the takeover by financier Sam Zell and the company’s ability to pay back that debt.
The company has been challenged by soft advertising environments in its core businesses. Tribune’s revenue was down 5.6% in the first half of the year, led by a 7.5% slide in its publishing division
The company needs $4.2 billion to fund the purchase of the remainder of Tribune shares to complete the buyout. Banks have committed to providing the loans for the money, but the financing costs are likely to be higher than the company anticipated as a result of the poor market conditions.
Higher borrowing costs may also force father-and-son team Charles and James Dolan to rethink how they will structure the financing needed to take Cablevision private. The company left open the door for change in a recent Securities and Exchange Commission filing stating that continued deterioration in the credit markets may increase interest costs beyond what was anticipated when the deal was initiated. A total of $13.9 billion is needed to complete the buyout, much of which would consist of debt raised in the market.
A shareholder vote is expected to take place in the fall, but nagging doubts over the deal are reflected in the company’s stock price. Cablevision stock trades at approximately 9% below the proposed take-out price of $36.26 per share.