Media General (
) announced that it reached an agreement for a short-term bridge
amendment with its lending group on Friday, February 10. The
amendment resets the leverage ratio for Q1 2012 to 7.60x as opposed
to the original 7.25x. After Q1, the leverage ratio resumes its
original schedule, with Q2′s leverage ratio set at 6.75x and Q3 at
6.00x. Since the announcement, the stock has appeared to find some
ground around $5 asMedia General management works with Bank of
) to find a solution to its $363MM term loan due in March 2013.
Usually positive refinancing news is met with a strong reaction by
equity participants butMedia General stock has been heldback by
confusion regarding what the bridge amendment may portend forMedia
General's final refinancing package and a laughably timed credit
review by Moody's (
Let's cover the ratings agencies first. Moody's is
reviewingMedia General for a potential credit downgrade givenMedia
General is in the refinancing process and was able to secure just a
short-term amendment.Media General's Corporate Family Rating is at
B3 as are its 11.75% bonds due 2017. It's a little bit of a joke
mainly becauseMoody's downgradedMedia General in early October 2011
to B3, which led to a stock drop of over 30% in a single
day.Moody's was followed by S&P which outdidMoody's by
downgradingMedia General to CCC a few weeks later. S&P
andMoody's have been trying to stay relevant since the housing
bubble implosion so have been far more active in screaming "fire"
whenever they can. Part of the problem is that their research
always seems to lag price action and they embarrass themselves even
In the fall of 2011,Media General's bonds were trading in the
$70s, having dropped from prices well above par in June,
whenMoody's and S&P decided to downgradeMedia General's credit.
It took a 30+% decline inMedia General's bonds before the
downgrade, and while any savvy investor could care less what
S&P orMoody's credit rating was, there were obviously plenty of
squeamish equity investors that fledMedia General stock once the
agencies downgradedMedia General's credit. The credit agencies
served both short sellers, who were able to capitalize on a random
event in terms of timing of the downgrade, as well as opportunistic
buyers that could acquireMedia General equity and fixed income for
Earlier last week,Moody's came along waving the threat of
downgradingMedia General's credit, trying to "catch up" to
S&P's CCC rating by placingMedia General in the Caa family.
This news rattled the stock on Wednesday, February 15, with shares
dropping by nearly 16% before rallying sharply to finish the day
down roughly 5%. Since that period the stock has continued to
climb.Moody's and S&P's October downgrades were a pathetically
lagged reaction toMedia General's price action on its bonds and
bank debt (which subsequently recovered strongly after the
downgrades) and whileMoody's looks like it now wants to be
proactive, the expected credit downgrade will largely be
meaningless given that S&P already ratesMedia General at CCC.
The overall question is does this even matter relative toMedia
General's stock price?
Market pricing provides far more information than irrelevant
credit agencies andMedia General's bond pricing suggests thatMedia
General debt investors are comfortable with whereMedia General
stands from a credit and potential refinancing standpoint.
Interestingly enough,Media General's equity holders seem more
cautious than bond holders. First, let's reviewMedia General's bond
prices. MEG's 11.75% high yield bonds have traded above $90 since
November 2011. SinceMoody's and S&P downgradedMedia General's
credit,Media General bonds rallied from the $70s to the upper $90s.
From December 2011 through February 2012,Media General's bonds have
consistently traded in the mid to upper $90s with recent trades as
high as $97 (February 13 2012). This implies a yield to maturity
("YTM") of 12.6%.
Another reason to be unconcerned with a credit downgrade is
because onceMedia General refinances, it is possible thatMedia
General could be in line for a credit upgrade. The biggest
obstacles forMedia General in regards to its debt is the $363MM
bank debt maturity in March 2013 and the leverage ratio step downs.
Ideally,Bank of America would have amended and extended the
existing credit deal butBank of America instead chose to provide a
short-term amendment. I was surprised by this action but the
pricing ofMedia General's bonds and broader leveraged loan market
suggests that the climate for leveraged entities has been thawing.
In this instance, rather than take a "delay and pray" approach,Bank
of America wants to take advantage of this refinancing window and
placeMedia General into the Term Loan B ("TLB") market.
In my most recent
, I expectedBank of America to amend and extendMedia General's
$363MM loan. I thoughtBank of America would hitMedia General up for
a high 1-1.5% in amendment/extension fees or basically $3-$5MM and
price the debt at L+700 with a 150 basis point LIBOR floor. The
fees would be a proxy for a typical original issue discount meaning
on a combined basis, the fees and interest expense would represent
a higher overall yield.Bank of America instead is working with
Capstone per theMedia General 8-K in arranging a TLB but the all in
cost toMedia General may not be that different.
In my original scenario ofBank of America hittingMedia General
up for $3-5MM for amendment/extension fees and pricing its new debt
at L+700 w/a 150 basis point LIBOR floor,Media General would be
looking at $31MM on the new loan, $5MM in fees, and then $35MM in
interest expense tied to its high yield bonds totaling $71MM in
annualized financing expenses. The TLB option could work out with a
similar total expense or perhaps even lower. Given whereMedia
General's high yield bonds trade, a TLB should be priced better
than the ~13% implied yield on those bonds. The TLB should also
have a better credit rating than the CCC/B3 (eventual Caa area) the
bonds are assigned because of the seniority and asset coverage the
term loan would have.
While there are not many perfect comps for what a newMedia
General deal could look like, there is one recent deal that may
provide some valuable insight on whereMedia General's TLB could
shake out. In late January, Spanish Broadcasting System (
) announced a refinancing of its term loan with 12.5% in $275MM in
secured notes priced at $97 maturing in April 2017. The yield on
these notes was 13.3% and the notes were rated B-/Caa1, pretty much
the the same as Media General's bonds if its S&P and Moody's
ratings were reversed. I think Media General could obtain better
terms than this for a number of reasons.
First, SBSA is all radio assets whileMedia General is primarily
considered a television broadcast/newspaper company with the
majority of its value driven by its broadcasting division.
Broadcast TV is a better credit than radio and will be reflected by
better pricing forMedia General. SBSA had more difficult timing as
well given its loan matured in the early part of 2012. As a result,
it raised its notes via a 144A private placement which prices at a
premium.Media General's TLB will be a syndicated loan and this is
another area which should result in better pricing forMedia General
relative to the SBSA deal. Another area whereMedia General would be
better than SBSA is its total leverage profile.
SBSA reported $45MM in LTM pro forma EBITDA which added back as
many one-time charges as possible (severance fees, uncapitalized
transaction fees, legal fees, etc.) when it announced its
refinancing. SBSA has $387MM in total debt when accounting for
$275MM in secured notes and $111MM in preferred stock and accrued
preferred stock dividends. With net cash of $33MM post refinancing
net debt is $353MM so SBSA is levered at 8.6x gross debt and 7.9x
net debt. SBSA also appears to have little room for error as well
with $45MM in EBITDA, an expected $36MM in interest expense and
$10MM in CapEx. The company will need to improve its operating
results to avoid being free cash flow negative out of the gates.
Yet despite all of this, it was able to quickly issue a significant
amount of capital at pretty attractive pricing. If there was not a
looming maturity issue, SBSA could have potentially had even better
In comparison,Media General should have EBITDA close to $95MM in
Q1 2012 as it prepares to refinance with the possibility that
EBITDA for 2011 eclipses $120MM. It has about $663MM in total debt
and about $640MM in net debt equating to 7.1x gross debt/EBITDA and
6.8x net debt/EBITDA. More importantly, SBSA's secured debt is 6.1x
EBITDA whileMedia General's secured debt translates to 3.9x
estimated Q1 2012 EBITDA. This is another significant difference
for whereMedia General's $363MM TLB should yield better pricing
relative to SBSA.
The credit markets have continued to improve and a fresh TLB
could also do better in terms of matchingMedia General's cash flow
profile. A fresh TLB could be a 5 year offering, longer than
whatBank of America would want to extendMedia General's existing
term loan for. This means the TLB would be due in early 2017 which
would be ideal forMedia General. One issue withBank of America
providing a modest three year extension would be maturity in an off
political year (2015) which would make deleveraging difficult and a
shorter extension problematic. However, a fresh TLB could bring
maturity to early 2017 which would coincide with the end of a
presidential election year in 2016 which would typically yieldMedia
General's strongest operating performance and cash flow.
While there is still near-term uncertainty regardingMedia
General's refinancing efforts, equity holders can look to recent
deals such as SBSA that set a floor in terms of whatMedia General
could obtain. In comparison to SBSA,Media General has better assets
which receive better pricing for leverage, better leverage ratios,
and better approach to market via syndication and since January,
when SBSA priced its offering, an even better climate for its
offering. The TLB should secure a rating in the Bs which given the
asset coverage and seniority relative toMedia General's high yield
bonds, which should further influence better pricing. As a result,
while equity investors appear rightfully cautious regardingMedia
General's refinancing efforts, they should also feel that things
may work very well due to fortuitous timing with regards to a
thawing credit market, in spite of a horrific, grossly incompetent
Author manages a hedge fund and managed accounts long MEG.
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