Media General (MEG) 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 as Media General management works with Bank of America (BAC) 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 but Media General stock has been held back by confusion regarding what the bridge amendment may portend for Media General’s final refinancing package and a laughably timed credit review by Moody’s (MCO).
Let’s cover the ratings agencies first. Moody’s is reviewing Media General for a potential credit downgrade given Media 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 because Moody’s downgraded Media 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 outdid Moody’s by downgrading Media General to CCC a few weeks later. S&P and Moody’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 more.
In the fall of 2011, Media General’s bonds were trading in the $70s, having dropped from prices well above par in June, when Moody’s and S&P decided to downgrade Media General’s credit. It took a 30+% decline in Media General’s bonds before the downgrade, and while any savvy investor could care less what S&P or Moody’s credit rating was, there were obviously plenty of squeamish equity investors that fled Media General stock once the agencies downgraded Media 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 acquire Media General equity and fixed income for attractive prices.
Earlier last week, Moody’s came along waving the threat of downgrading Media General’s credit, trying to “catch up” to S&P’s CCC rating by placing Media 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 to Media General’s price action on its bonds and bank debt (which subsequently recovered strongly after the downgrades) and while Moody’s looks like it now wants to be proactive, the expected credit downgrade will largely be meaningless given that S&P already rates Media General at CCC. The overall question is does this even matter relative to Media General’s stock price?
Market pricing provides far more information than irrelevant credit agencies and Media General’s bond pricing suggests that Media General debt investors are comfortable with where Media 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 review Media General’s bond prices. MEG’s 11.75% high yield bonds have traded above $90 since November 2011. Since Moody’s and S&P downgraded Media 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%.
The Q4 2011 conference call had investors such as Third Point and Knighthead Capital, both familiar and active investors in distressed credit. These investors represent the likely holders of Media General’s high yield bonds and the current pricing of those bonds and the historical track record of Moody’s and S&P with regards to Media General suggest that equity investors are better off ignoring any changes to Media General’s credit rating by the agencies. The types of holders of Media General’s bonds are not the typical stuffees that would ride the bonds to a hefty loss. Basically if Media General bonds are in the upper 90s, bondholders feel that Media General has little risk of bankruptcy and/or the bonds are close to “money good.” Also, given the high price of Media General’s bonds, current bond investors are more likely to lean towards the former rather than the latter. This is because a vulture investor would want a higher margin of safety on those bonds.
Another reason to be unconcerned with a credit downgrade is because once Media General refinances, it is possible that Media General could be in line for a credit upgrade. The biggest obstacles for Media 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 but Bank of America instead chose to provide a short-term amendment. I was surprised by this action but the pricing of Media 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 place Media General into the Term Loan B (“TLB”) market.
In my most recent write-up, I expected Bank of America to amend and extend Media General’s $363MM loan. I thought Bank of America would hit Media 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 the Media General 8-K in arranging a TLB but the all in cost to Media General may not be that different.
In my original scenario of Bank of America hitting Media 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 where Media 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 new Media General deal could look like, there is one recent deal that may provide some valuable insight on where Media General’s TLB could shake out. In late January, Spanish Broadcasting System (SBSA) 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 while Media 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 for Media 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 for Media General relative to the SBSA deal. Another area where Media 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 pricing.
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 while Media General’s secured debt translates to 3.9x estimated Q1 2012 EBITDA. This is another significant difference for where Media General’s $363MM TLB should yield better pricing relative to SBSA.
In comparison to SBSA, MEG has better assets from a credit/pricing standpoint, better approach to market via syndication as opposed to a 144A, and better total leverage ratios. With MEG’s bonds trading in the high $90s and yielding less than 13%, the debt market appears to be saying that MEG’s TLB offering should price quite strongly yet equity participants appear much more cautious. In this context, BAC’s actions in a short-term amendment make sense.
The credit markets have continued to improve and a fresh TLB could also do better in terms of matching Media General’s cash flow profile. A fresh TLB could be a 5 year offering, longer than what Bank of America would want to extend Media General’s existing term loan for. This means the TLB would be due in early 2017 which would be ideal for Media General. One issue with Bank 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 yield Media General’s strongest operating performance and cash flow.
While there is still near-term uncertainty regarding Media General’s refinancing efforts, equity holders can look to recent deals such as SBSA that set a floor in terms of what Media 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 to Media General’s high yield bonds, which should further influence better pricing. As a result, while equity investors appear rightfully cautious regarding Media 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 management team.
Disclosure: Author manages a hedge fund and managed accounts long MEG.