Troubling Radio Industry Finances

[ThatVoice22]

Taken together, it’s a dismal outlook for the major radio broadcasters:
Audacy (AUDA) jumped up 9% today….But, that’s what can happen when yesterday’s stock value was a paltry 86 cents and today it increased to 94 cents. At last earnings report, Audacy had lost a whopping $62 per share.
- - The 52 week high for AUDA was $23!
Salem Media (SALM) is scraping along at 76 cents and, at the last earnings report, was losing 13 cents per share. The SALM 52 week high was $2.60.
Cumulus Media (CMLS) emerged from bankruptcy in May of last year and lost 78 cents per share at last report. Today’s CMLS share price was $4.93. The 52 week high for CMLS was $10.
I-Heart Media (IHRT) emerged from bankruptcy 4 years ago, but the stock price dropped 13% this past March and stands at $3.43 today. At last earnings report, IHRT was losing $2.96 per share. The IHRT 52 week high was $10.85.
Urban One (UONE) lost 5% today to hit $5.25 per share. At least it has positive earnings at 72 cents per share. The UONE 52 week high was $8.
TownSquare Media (TSQ) operates in small-to-medium markets and seems to be one of the few thriving commercial radio companies, as it jumped 11% today to $10 with earnings of 43 cents per share. The TSQ 52 week high was $12.65. In Texas, TSQ has stations in Abilene, Amarillo, El Paso, Killeen-Temple, Lubbock, Lufkin, Midland-Odessa, San Angelo, Tyler-Longview, Victoria, and Wichita Falls - and they make good money when the big companies in the big cities are struggling.
Satellite provider Sirius-XM Radio (SIRI) is doing so-so, making 29 cents per share at $4.80, well below the 52 week high of $8. Sirius-XM “almost” declared bankruptcy in late 2020 and recently cut 8% of its workforce.
Here are the CNBC stock quote details for each company:
- - https://www.cnbc.com/quotes/AUDA
- - https://www.cnbc.com/quotes/SALM
- - https://www.cnbc.com/quotes/CMLS
- - https://www.cnbc.com/quotes/IHRT
- - https://www.cnbc.com/quotes/TSQ
- - https://www.cnbc.com/quotes/SIRI

 

[TheBigA]

Radio was a much safer business when it was part of much larger companies, such as RCA, GE, Nationwide Insurance, Westinghouse Electric, and Lincoln-Financial. The equivalent today would be for companies such as Apple, Amazon, and Spotify owning radio. In a way they do, but they're not the kind of radio that is built around towers and transmitters.

 

[davideduardo]

I-Heart Media (IHRT) emerged from bankruptcy 4 years ago, but the stock price dropped 13% this past March and stands at $3.43 today. At last earnings report, IHRT was losing $2.96 per share. The IHRT 52 week high was $10.85.

But the operations are profitable. What causes the loss is interest payment on the loans. But they are paying down the loans faster than required.

Urban One (UONE) lost 5% today to hit $5.25 per share. At least it has positive earnings at 72 cents per share. The UONE 52 week high was $8.

Remember, bad market days often affect everyone as computer driven benchmarks cause automatic buys and selling. This can often result in a the same entity beying and selling several times in the same session,

TownSquare Media (TSQ) operates in small-to-medium markets and seems to be one of the few thriving commercial radio companies, as it jumped 11% today to $10 with earnings of 43 cents per share. The TSQ 52 week high was $12.65. In Texas, TSQ has stations in Abilene, Amarillo, El Paso, Killeen-Temple, Lubbock, Lufkin, Midland-Odessa, San Angelo, Tyler-Longview, Victoria, and Wichita Falls - and they make good money when the big companies in the big cities are struggling.

They make good money because over half of their revenue and more than half of the profits come from online operations. They use radio as part of a multi-tiered marketing plan they sell to local direct accounts.

 

[davideduardo]

Radio was a much safer business when it was part of much larger companies, such as RCA, GE, Nationwide Insurance, Westinghouse Electric, and Lincoln-Financial. The equivalent today would be for companies such as Apple, Amazon, and Spotify owning radio. In a way they do, but they're not the kind of radio that is built around towers and transmitters.

Add in companies like RKO General, Plough (Drugs), Bonneville (multiple LDS businesses), Palmer (schools), Cox (before the split into multiple division), Metromedia (telecom, property, etc), Susquehanna (ceramics), Doubleday (Publishing), Storer (first decades in gas station and fuel businesses), Nationwide (Insurance), RustCraft (Greeting Cards and Hobbies), Sarkes Tarzian (Electronic gear), Triangle (Publishing including TV Guide), United Artist Stations (Movies), Avco (electronicws, aircraft engines, abrasives, chemicals, movies and even Carte Blanche), Chris-Craft Industries (Yachts and Marine), Kaiser Broadcasting (Kaiser Industries).

 

[HTX]

I don't know what this has to do with Houston

 

[davideduardo]

I don't know what this has to do with Houston

It demonstrates some of the issues with radio today, where current total radio revenue adjusted for inflation is off by abouty 65% compared with 2002.

 

[HTX]

It demonstrates some of the issues with radio today, where current total radio revenue adjusted for inflation is off by abouty 65% compared with 2002.

But shouldn’t this be in the national thread or something?

 

[davideduardo]

But shouldn’t this be in the national thread or something?

It is a piece of data that applies to Houston as well. But I am moving it per your suggestion.

 

[Kelly A]

After the 2008 recession, Wall St. determined that social media and streaming were the future, not traditional radio and TV.
Fast forward to today; the consolidated big radio groups that didn't diversify into business models other than traditional broadcast media, faced increasing headwinds first by the plummeting of their assets falling values. And for those who sold their soul to gain a quick influx of shareholder money by going public in the 90s and early 2000s, the bottom has completely fallen out of traditional media stocks. Now more recently; all ad-supported media has faced challenges due to ad budgets being cut, or redirected to forms other than broadcasting.

 

[BoboKnight]

Not only did Salem report the Q2 loss, they anounced they violated a debt covenant and signed a forbearance agreement, in which their lender agreed not to call their debt through the end of August. As part of the forbearance agreement, their revolver was reduced from $30 million to $25 million. They had $22.6 million outstanding on the revolver at 6/30/23.

Presumably, they are either trying to refinance or renegotiate their loan terms

 

[Kelly A]

Not only did Salem report the Q2 loss, they anounced they violated a debt covenant and signed a forbearance agreement, in which their lender agreed not to call their debt through the end of August. As part of the forbearance agreement, their revolver was reduced from $30 million to $25 million. They had $22.6 million outstanding on the revolver at 6/30/23.

Presumably, they are either trying to refinance or renegotiate their loan terms

Here is their latest 10-Q filing which spells out the default on page 55:

https://investor.salemmedia.com/sec-filings/all-sec-filings/content/0001193125-23-206423/0001193125-23-206423.pdf

In a nutshell; they set up an Asset Based Revolving Credit Facility (ABL) back in 2017 with Wells Fargo. As it states, an ABL is a revolving line of credit which as with any loan or credit line, has certain stated covenants.
In the case of this credit agreement, it appears they exceeded their fixed maximum revolver amount by $4.5M, and potentially missed some relatively small percentage "debt issuance" charges that companies pay to essentially keep the balance of a revolving line of credit in play and available.
Quoting from the report (link included above):
"Because the availability was less than $4.5 million during the quarter, we were required to test against the fixed charge coverage ratio covenant. The fixed charge coverage ratio was below the required 1.0 to 1.0 level during the quarter and therefore, we were not in compliance with that covenant. On August 7, 2023 we signed a forbearance whereby the bank agreed not to exercise remedies on the default during the month of August. Additionally, the notional amount of the revolver was reduced from $30.0 million to $25.0 million with a minimum availability of $1.0 million. Finally, the interest rate on the ABL Facility was increased by two percentage points effective July 1, 2023 through the date of the forbearance amendment."

So to summarize; they broke a relatively small covenant on a revolving line of credit. Wells cut them a break but jacked their interest in this revolver by two percent.

 

[BoboKnight]

So to summarize; they broke a relatively small covenant on a revolving line of credit. Wells cut them a break but jacked their interest in this revolver by two percent.

They still have the August 31 deadline to deal with. It’s “relatively small” unless Wells Fargo calls the revolver after that point in time.

On their conference call, Salem said they are working on a more permanent solution. but there’s no guarantee they will get Wells Fargo to agree to one.

 

[Kelly A]

They still have the August 31 deadline to deal with. It’s “relatively small” unless Wells Fargo calls the revolver after that point in time.

On their conference call, Salem said they are working on a more permanent solution. but there’s no guarantee they will get Wells Fargo to agree to one.

The way I read it, Wells already worked with Salem on a solution. Come into compliance and pay an extra 2% by August 31st.
Since this revolving line of credit has been around since 2017, it's unlikely that any lender would be willing to drop the hammer on something like this. They'd rather keep a customer by working a deal with the potential of borrowing more in the future.

 

[MarkW]

I am inclined to disagree that the solution is so simple. Salem is in significant financial peril. They had only $2,000 (yes, you read that correctly) of cash on hand at June 30, and the FCCR test sprung into effect (which Salem failed, likely by a sizable margin) because unused ABL availability slipped below $4.5 million (15 percent of the $30 million ABL commitment amount).

Specifically, the company had only $2.2 million of unused borrowing availability as of June 30, which is why FCCR was tested.

The company needs cash, whether from a new debt issuance or some other means (such as a quick asset sale). I don't think they'll be able to pull it off without going thru a Chapter 11 reorg.

On March 20, they raised $41.9 million from issuing $44.7 million in 2028 unsecured notes (thus, a $2.8 million OID), of which $36.5 million of the $41.9 million was used to retire all remaining 2024 notes, leaving $5.4 million in net cash. Of that amount, a sizable portion likely paid underwriting and professional fees. Looks like about $4 million in transaction costs were incurred, but I think this may include the $2.8 million OID. The company also increased ABL utilization by about $15 million since the start of the year, yet has negligible cash on hand.

So, the company very clearly is suffering severe cash burn.

I think a bankruptcy filing is highly likely. Look for a good chunk of the ~$159 million in 2028 notes to be equitized. I do think WFC would probably be provider of the DIP facility to fund the bankruptcy, and that (coupled with the prepetition ABL facility balance) would likely be repaid via an Exit facility to be provided by WFC, which would include a new money component. Alternatively, the reorg plan could include a proviso whereby the senior unsecured noteholders may be offered preferential treatment of their prepetition claim if they elect to become a "new money" exit financing lender. If mostly institutional investors hold the 2028 notes, I think the inclusion of such a provision in the plan of reorganization is quite possible.

Let's see if WFC pushes Salem to sell any assets (*cough* WAVA *cough*). I think any such push would likely occur after exit from BK. When trying to sell assets in Bankruptcy, bidders usually offer less.

 

[BoboKnight]

I am inclined to disagree that the solution is so simple. Salem is in significant financial peril. They had only $2,000 (yes, you read that correctly) of cash on hand at June 30, and the FCCR test sprung into effect (which Salem failed, likely by a sizable margin) because unused ABL availability slipped below $4.5 million (15 percent of the $30 million ABL commitment amount).

Specifically, the company had only $2.2 million of unused borrowing availability as of June 30, which is why FCCR was tested.

The company needs cash, whether from a new debt issuance or some other means (such as a quick asset sale). I don't think they'll be able to pull it off without going thru a Chapter 11 reorg.

On March 20, they raised $41.9 million from issuing $44.7 million in 2028 unsecured notes (thus, a $2.8 million OID), of which $36.5 million of the $41.9 million was used to retire all remaining 2024 notes, leaving $5.4 million in net cash. Of that amount, a sizable portion likely paid underwriting and professional fees. Looks like about $4 million in transaction costs were incurred, but I think this may include the $2.8 million OID. The company also increased ABL utilization by about $15 million since the start of the year, yet has negligible cash on hand.

So, the company very clearly is suffering severe cash burn.

I think a bankruptcy filing is highly likely. Look for a good chunk of the ~$159 million in 2028 notes to be equitized. I do think WFC would probably be provider of the DIP facility to fund the bankruptcy, and that (coupled with the prepetition ABL facility balance) would likely be repaid via an Exit facility to be provided by WFC, which would include a new money component. Alternatively, the reorg plan could include a proviso whereby the senior unsecured noteholders may be offered preferential treatment of their prepetition claim if they elect to become a "new money" exit financing lender. If mostly institutional investors hold the 2028 notes, I think the inclusion of such a provision in the plan of reorganization is quite possible.

Let's see if WFC pushes Salem to sell any assets (*cough* WAVA *cough*). I think any such push would likely occur after exit from BK. When trying to sell assets in Bankruptcy, bidders usually offer less.

Agree, except the $2,000 in cash isn’t a big deal to me. That is a product of having a sweep to their revolver. The lack of availability on their revolver is a huge deal. They had $25.1 million borrowing base, $22.6 million outstanding on the revolver, and $.3 million in letters of credit at June 30.
With the max advance at $25 million, and $1 million in minimum availability, the max they can have outstanding is either $24 million ($25 less $1 minimum availability or 24.1 million ($25.1 less $1 minimum availability). That leaves only approximately $1.1 million available on the revolver. That’s less than a weeks worth of operating expenses (before depreciation amortization, and other non cash expenses).

 

[Kelly A]

I am inclined to disagree that the solution is so simple. Salem is in significant financial peril.

Maybe not for the long haul, but at least for this particular covenant violation, it's already been resolved provided Salem follows through with the plan. Even then, this particular covenant isn't a bankruptcy maker.

They had only $2,000 (yes, you read that correctly) of cash on hand at June 30, and the FCCR test sprung into effect (which Salem failed, likely by a sizable margin) because unused ABL availability slipped below $4.5 million (15 percent of the $30 million ABL commitment amount).

I believe there are some pending station sales in the mix. There have also been pretty significant expense cuts on the corporate and local station fronts. The problem is the majority of their stations are AMs. Unless there are transmitter sites that appeal to developers, we've already been over why trying to sell those stations is a concern.

Specifically, the company had only $2.2 million of unused borrowing availability as of June 30, which is why FCCR was tested.

That's assuming that Salem needs to borrow more to continue operations that have been adjusted through expense cuts. They may have enough pending revenue to maintain operations without having to borrow from revolvers.

 

[MarkW]

If they can close some meaningful asset sales quickly, they may be able to dodge bankruptcy for a while. I am skeptical they have cut expense sufficiently to resolve the cash burn issue.

I'm sure they (and their creditors) are hoping the 2024 election will bring some much needed lift to revenue next year.

 

[MarkW]

Agree, except the $2,000 in cash isn’t a big deal to me. That is a product of having a sweep to their revolver. The lack of availability on their revolver is a huge deal. They had $25.1 million borrowing base, $22.6 million outstanding on the revolver, and $.3 million in letters of credit at June 30.
With the max advance at $25 million, and $1 million in minimum availability, the max they can have outstanding is either $24 million ($25 less $1 minimum availability or 24.1 million ($25.1 less $1 minimum availability). That leaves only approximately $1.1 million available on the revolver. That’s less than a weeks worth of operating expenses (before depreciation amortization, and other non cash expenses).

Great points.

Some companies defensively draw their revolver to ensure they have a reserve of cash on hand to fund ongoing burn if they have reason to believe a covenant breach is on the horizon.

You are right regarding the nightly sweep. This is why Salem was unable to employ the strategy I just mentioned. It is somewhat unusual to see the peg balance (i.e unswept balance) set so low for such a large company.

You are also right that $1.1 million in liquid resource availability isn't squat for a company of this size. We'll see what happens come August 31. If it's true asset sales are lined up, we could certainly see a second forbearance (perhaps for a multi-month duration) to provide runway for the sale(s) to close.

I've not seen any news that the company has retained restructuring advisors, so I don't think a BK is imminent just yet.

If an 8-K is issued announcing engagement of advisors, then we'll know a near term filing is likely.

 

[BoboKnight]

Maybe not for the long haul, but at least for this particular covenant violation, it's already been resolved provided Salem follows through with the plan. Even then, this particular covenant isn't a bankruptcy maker.

The plan is to continue to negotiate with Wells Fargo. That isn’t exactly anywhere close to a bullet proof plan. The covenant isn’t a bankruptcy maker? Where will they come up with the cash to pay off the approximately $25 million borrowed? Also, do any of their long term debt have cross default provisions the holders can invoke if Welle Fargo calls the revolver?

I believe there are some pending station sales in the mix. There have also been pretty significant expense cuts on the corporate and local station fronts. The problem is the majority of their stations are AMs. Unless there are transmitter sites that appeal to developers, we've already been over why trying to sell those stations is a concern.

That's assuming that Salem needs to borrow more to continue operations that have been adjusted through expense cuts. They may have enough pending revenue to maintain operations without having to borrow from revolvers.

They guided a decline of revenue between 3% and 5% and an operating expense (before gains, losses, depreciation and amortization) down 1% and 3% for Q3 2023 vs Q3 2022. Using midpoints, that’s a drop in revenue of $2.6 million and a decline in operating expenses of $1.2 million. That puts them at a pretax loss of approximately $1.6 million, excluding gains, losses, and one time items for Q3.

The only pending transaction is the sale of KSAC for $1 million. They recorded a $3.3 million impairment in Q2 related to the sale.

 

[Kelly A]

The plan is to continue to negotiate with Wells Fargo. That isn’t exactly anywhere close to a bullet proof plan. The covenant isn’t a bankruptcy maker?

Sounds like some sort of beef with Salem might be clouding your understanding of this particular situation. Violating one covenant of a particular revolving line of credit isn't going to force bankruptcy. My bet is Salem has additional lenders and other revolving lines of credit.

Where will they come up with the cash to pay off the approximately $25 million borrowed? Also, do any of their long term debt have cross default provisions the holders can invoke if Welle Fargo calls the revolver?

I know it sounds like a lot of money to someone like us, but renegotiating a $25M loan is pretty small potatoes to a business valued at hundreds of millions.

They guided a decline of revenue between 3% and 5% and an operating expense (before gains, losses, depreciation and amortization) down 1% and 3% for Q3 2023 vs Q3 2022. Using midpoints, that’s a drop in revenue of $2.6 million and a decline in operating expenses of $1.2 million. That puts them at a pretax loss of approximately $1.6 million, excluding gains, losses, and one time items for Q3.

Sure, all media companies, especially traditional radio, and TV, are seeing similar percentage declines. This is nothing unique to Salem.