LodgeNet plans to clear debt hurdles with lift from Colony Capital

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LodgeNet Interactive is attempting to address its near-term debt maturities with help from a new money investment from Colony Capital, three sources familiar with the matter tell Debtwire.

Proceeds from Colony’s pending junior capital investment of around USD 25m would be used to pay down the issuer’s existing first lien debt, thereby enticing lenders to swap their remaining holdings into new five-year first lien and/or seven-year second lien loans, the sources continued.

The pricing and tranche size of the new loans are being negotiated. A bank meeting on the transaction is expected to take place at the end of the month, added the first source. Loan agent JP Morgan is being replaced by Gleacher.

The provider of interactive media and internet services to the hospitality and healthcare sectors has been operating under forbearance after breaching its credit agreement’s leverage covenant in 3Q12 ended 30 September. The forbearance period runs through 17 December. At third quarter end, LodgeNet’s leverage ratio stood at 4.52x -- implying around USD 76m of covenant adjusted LTM EBITDA -- versus a 4x maximum covenant, according to SEC filings.

The publicly traded South Dakota-company’s capital structure includes a USD 25m revolver coming due in April 2013, followed by a USD 325.4m term loan maturing April 2014. Outstanding borrowings on the revolver totaled USD 21m at 30 September. The term loan pays 6.5% annual interest, while the revolver pays 7.25%, including 2% of default interest. The TL is quoted 76.75/78.917 this week, up from 76/78.3 on 2 November, according to Markit. Lodgenet shares closed at USD 0.11 for a USD 2.9m market cap on 21 November, down from USD 0.75 in early October.

In its 3Q report, LodgeNet noted that it’s engaged in negotiations with a steering committee of lenders and certain third parties regarding restructuring options. Included in those discussions is the potential for a sale transaction with a third party that would involve pushing out the debt maturities and a new equity contribution. The company also noted that it could have to pursue a Chapter 11 filing to execute a change of control transaction.

Colony has other investments in the hotel and entertainment industries that could be complementary to a strategic stake in LodgeNet. The firm teamed with other bidders in acquiring film and television studio Miramax in 2010. Colony Principal Richard Nanula is a former Disney executive who serves as Miramax chairman.

LodgeNet, which is being advised by legal Weil Gotshal and advisors Miller Buckfire and FTI Consulting, has also had discussions with strategic DISH Network about a potential sale, as previously reported by Debtwire in October.

“A purchase by DISH would be a cheap way for it to gain 1.2m subscribers,” a trading desk analyst noted. “For LodgeNet, a partnership would give them a better and cheaper operating agreement.”

DISH CEO Charlie Ergen’s style has been to buy financially distressed companies after they file for bankruptcy, the analyst continued. “He thinks it’s the cheapest and cleanest way to do it, and it enables him to dump all the liabilities.” The media maven acquired Blockbuster as well as TerreStar Networks and DBSD North America out of bankruptcy last year.

LodgeNet’s earnings have suffered of late from a cutback in discretionary consumer spending as well as sluggish demand due to a surge in personalized electronic competition. To combat its down-trending earnings, the company has focused on growth in its digital platform with the aim of unlocking new revenue streams.

For its third quarter, the company incurred a net loss of USD 2m versus net income of USD 2m generated in the prior year period. Total revenues for the period slid 15% to USD 86.8m from 3Q11’s USD 101.8m.

Under the terms of its forbearance, the issuer is required to maintain at least USD 8.7m of consolidated EBITDA for the period beginning 1 October and ending 30 November. At 30 September the company had USD 18m of cash.

A steering group of lenders, including KKR and Eaton Vance, is working with advisor CDG Group and legal counsel Akin Gump.

Messages for officials at LodgeNet, DISH and Colony Capital were not returned.

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