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Expanding multiples in the broadcast industry helped drive a 15-point rally in Citadel Broadcasting’s loan last month, Debtwire reports. Investors bet big that the ailing sector is finally bottoming out and that a long-awaited restructuring event is around the corner, said sources close to the situation, loan traders and industry analysts.
Whether those positions pay out depends on two factors: how well newly bullish valuations hold up as the company negotiates a pre-arranged bankruptcy with lenders, and the sustainability of the operational rebound radio broadcasters delivered in recent weeks.
Media assets now trade in a broad 6x-8x EBITDA range, up significantly from the 4x-5x ghetto they briefly visited in 2Q09, said three buyside sources. Clearly the rebound reflects technical factors that pumped up all leveraged companies in recent months, but it also speaks to two fundamental changes; investors’ growing conviction that the ad market is bottoming out and the tangible boost to earnings from trenchant cost cutting.
Some broadcasters and publishers – name-brands only – have even been let back into the primary markets. Gannett refinanced existing debt with unsecured bonds yielding 9.125%-9.625% in 3Q09, while Sinclair issued new second lien paper at 9.75%.
Citadel’s USD 2bn of secured loans rode a rising tide higher since September in a rally that places the battered radio empire on the lower end of the new pricing paradigm. The loans surged 10-15 points in that timeframe to hit 69/70, implying a 6.4x multiple of EBITDA using a 2008-2009 average of USD 217.5m. That compares to a 4.7x multiple on 1 September when the loans were quoted 56/58. according to Markit.
The price correction coincides with signs that the year-over-year revenue declines in the radio business have started to finally slow down after a horrific first half. The industry posted its best month in September, when radio revenue dropped 14% on average, said James Boyle, an analyst with Gilford Securities. This compares to a decline of 19%-21% in July and August, a 22% fall in 2Q09 and a 24% plunge in 1Q09. Niche radio operator Radio One reported earlier this week that its revenue declines slowed to 12% in 3Q09 from 16% over the 1H09.
Citadel’s network of 223 stations occupies a variety of properties, from top-25 market in New York and Los Angeles, to more mid-size segments, such as Providence, Rhode Island, according to SEC filings. Part of the recovery comes down to temporary stimulus – generally, one-third of radio station revenues came from auto dealers in but the fact that advertisers are starting to buy longer spots may indicate a broader-based improvement, said two radio brokers.
Heavy rotation
Citadel and its lenders have had advisors in place since the spring-- but the workout process bogged down amid regulatory issues, questions over management compensation and inter-creditor bickering between the banks, CLOs and hedge funds that hold the loans. The mix of loan holders shifted significantly since mid-September as distressed investors took larger positions in anticipation of a debt-for-equity swap announcement in the near term, said multiple buyside sources.
The company and its ad hoc lenders had been discussing a partial equitization of the debt, plus reinstatement of USD 400m-USD 800m in first lien debt. Citadel’s new valuation range in secondary markets suggest the company might be able to carry post-restructuring debt on the higher end of that range, said a source close to the situation.
Any change of control at Citadel is complicated by the fact that FCC rules restrict foreign ownership in broadcast properties to 25% but much of the broadcaster’s loans are held by Bermuda-domiciled CLOs, said a source close to the situation. The final fly in the ointment has been ongoing talks over how many stock options should be granted to senior management led by CEO Farid Suleman and COO Judy Ellis, said a source close to the situation.
The team gained a reputation as savvy operators but lost a lot of face when its USD 2.7bn boom-time acquisition of ABC Radio from Walt Disney Company in 2007 fell flat, said a sellside analyst and buyside sources. Citadel purchased the business at double digit multiples of the company’s earnings. Recently, Citadel valued its entire business, including the ABC assets, at around 5x EBITDA in connection with non-cash impairment charges it took in 2Q09 to reduce the carrying value of its FCC licenses, according to SEC filings.
As of 30 June, Citadel’s capital structure consists of the USD 1.362bn TLB, USD 533m TLA and USD 137m drawn under its revolver. In addition, Citadel had USD 49m in 8% convertible notes due 2011 trading at 17.5. The stock, which trades on the over-the-counter markets, traded from USD 0.06 on 1 September, to as high as USD 0.17 on 21 October before settling down to USD 0.11.
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