LIN TV, Belo May Breach Loan Pacts as Cash Declines

April 14 (Bloomberg) -- LIN TV Corp. and Belo Corp., their cash flows declining as ad sales drop, risk breaching loan agreements this year and face higher bank fees and interest to renegotiate the deals.

Broadcasters may violate loan covenants if earnings-to-debt ratios fall below minimum levels set in credit agreements, said Neil Begley, a bond analyst with Moody’s Investors Service. To amend the loans, the broadcasters may be required to pay fees and higher interest, using up more cash, he said.

“They’re going to have to duke it out with the banks,” Begley said in an interview. If earnings for TV broadcasters “keep getting worse, you’ll probably see a lot of restructurings,” he said.

Revenue at independent or non-network-owned chains such as LIN and Belo has plummeted as the global recession chokes consumer spending. Automotive advertising was off as much as 40 percent in the fourth quarter, broadcasters reported. Auto commercials made up as much as a fourth of ad sales for TV companies, said Barry Lucas, an analyst with Gabelli & Co. in Rye, New York.

“Until domestic auto revenue starts improving, it’s hard for these companies to do a lot better,” Lucas said in an interview.

Belo and LIN own or operate 47 TV stations. Belo says its stations reach 14 percent of U.S. households with televisions. LIN says its broadcasts reach 9 percent. Providence, Rhode Island-based LIN’s biggest markets are Dallas-Fort Worth, Indianapolis and San Diego. Dallas-based Belo’s major markets are Dallas-Fort Worth, Houston and Phoenix.

‘Remain Compliant’

LIN “expects to remain compliant” with its covenants, while “preparing to seek an amendment if we deem it necessary,” Chief Financial Officer Richard Schmaeling said in an interview. Belo renegotiated terms in February, with a goal of not having to seek further relief. “We hope that’s the case,” Belo spokesman Paul Fry said in an interview.

Belo’s debt totaled $1.09 billion at the end of 2008, while LIN’s amounted to $743.4 million, according to regulatory filings. Bank loans are a portion of the debt. The totals are used to calculate leverage ratios. The ratio is the company’s debt divided by its earnings before interest, taxes, amortization and depreciation, or Ebitda. The allowable ratio is set in negotiations between the companies and their lenders.

Companies that violate covenants and fail to secure waivers on the bank loans may face default. New York-based Young Broadcasting Inc., owner of 10 stations, filed for bankruptcy protection in February after missing interest payments.

Distressed Debt Exchanges

Broadcasters may turn to what Begley called “distressed debt exchanges” to stay within the leverage ratios of their loan agreements.

One debt exchange is known as PIK, or payment-in-kind, which provides investors with bonds or preferred stock, not cash. Nexstar Broadcasting Group Inc., the Irving, Texas-based owner of 32 stations, exchanged as much as $143.6 million of 7 percent notes for $142.3 million in PIKs, according to a March 30 statement.

“PIKs are a way for companies to save cash during a downturn,” said Shelly Lombard, a high-yield bond analyst with New York-based Gimme Credit.

Nexstar’s debt exchange provided “immediate covenant relief,” Moody’s said in a report April 2. The company still needs to secure an amendment to its loan agreements or risk a breach, according to Moody’s, citing the decline in ad spending. Nexstar had no comment, according to Joe Jaffoni, an outside spokesman for Nexstar at Jaffoni & Collins Inc.

‘Relief’ at Gray

Gray Television Inc., the Atlanta-based operator of 36 stations, won “relief” from pressure on its debt covenant this year when it amended its credit facility at the end of March, Moody’s said in a report April 1.

Gray, which has suspended cash dividends, was required to pay higher fees and accepted restrictions on borrowing and capital spending in exchange for an increase in the leverage ratio from its banks, according to a March 31 regulatory filing.

LIN has “an increased likelihood of bumping against its covenants” in the second half of 2009, said Jonathan Levine, a Stamford, Connecticut-based analyst with Jefferies & Co. “They would probably go to their banks to get a waiver and amendment to give them some flexibility.”

The banks might require an increase of two to four percentage points in the interest rate on LIN’s debt if they grant a waiver, Levine estimated in a report.

LIN’s Ebitda fell 11 percent in the fourth quarter to $32.9 million. Cash and short-term investments tumbled by half to $20.1 million from a year earlier.

‘Terms Aren’t Cheap’

“We have been consulting with our financial advisers,” LIN CFO Schmaeling said in an interview. “When you look at the amendments that are getting done in the marketplace now in our space, those revised terms aren’t cheap.”

At the end of 2008, the company had $135 million outstanding on its revolving credit facility and $78 million outstanding on its term loan, Schmaeling said.

“If things don’t improve, we have further cost-reduction actions we can put in place,” Schmaeling said. He declined to give details.

‘More Prolonged’ Downturn

Moody’s cited the possibility of a Belo default when it lowered ratings on $642 million in debt on March 4. A “more prolonged advertising downturn than anticipated” may prevent Belo from meeting covenants by the end of 2009, Moody’s said.

Belo’s Ebitda dropped 13 percent in the fourth quarter to $73.1 million. Cash and short-term investments fell 48 percent.

“In our current round of negotiations with the banks, we tried to get terms that will prevent us from going back to them,” Belo spokesman Fry said.

Belo won an increase in its maximum leverage ratio to 6.25- to-1 from 5.75-to-1 in February, according to a regulatory filing. The window narrows to 6-to-1 in July 2010, 5.75-to-1 on Sept. 30 and 5-to-1 on Dec. 31, Belo said in the March 2 filing. The company reported $437 million in a revolving credit facility at the end of 2008, according to the filing.

Ad sales may rebound next year from the 2010 Winter Olympics and political spending for U.S. congressional, state and local elections, said James Goss, an analyst with Barrington Research in Chicago.

“The question is, can they make it through 2009 so they can get the bump in earnings from political advertising revenue in 2010?” said Jefferies & Co.’s Levine.

Belo, whose shares plunged 91 percent in the past 12 months, climbed 9 cents, or 11 percent, to 90 cents at 4 p.m. in New York Stock Exchange composite trading. LIN declined 14 cents, or 8.6 percent, to $1.49. LIN shares lost 85 percent in the past year.

source:http://www.bloomberg.com/apps/news