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Two years after Big Brother creator Endemol closed a rocky syndication of its LBO financing, the company is facing shrinking headroom on it financial covenants. A number of restructuring advisors approached the Dutch television production company in recent months to help workout its EUR 2.4bn debt burden, but management has rebuffed all comers so far, four sources familiar with the matter told Debtwire.

A consortium of PE investors led by Goldman Sachs bought Endemol in May 2008 with a EUR 2.7bn debt package that is crushing margins for the producer of Deal or No Deal. The catalyst restructuring professionals see on the horizon is an imminent covenant breach now that the company can no longer pad earnings with debt buybacks.

Distressed investors see the same writing on the wall, but they are waiting to dip in until visibility improves on exactly when Goldman and its co-investors plan to face the music, said a distressed investor. Vulture fund managers may also be waiting for the buyout debt to take another leg down.

Barclays Capital, Credit Suisse, Goldman Sachs, ABN Amro syndicated the loans despite choppy markets and investor concerns about high leverage and the lack of hard assets. The debt was eventually placed at 75 on a financed basis and 70 on a cash basis.

The loans crashed in early 2009 to the mid 30s before slowly retracing to current levels in the mid 60s, according to Markit. Given that the debt now trades in line with original pricing, upside looks limited and bargain buyers are keeping their powder dry.

“It’s still not clear whether the company is going to breach its leverage test in the fourth quarter of this year or the first quarter of next, which makes an investment even more difficult,” the distressed investor noted. The fact that the Goldman consortium has have bought up much of the company’s debt at distressed levels complicates the matter further.

Goldman Sachs is present throughout the capital structure and predominantly holds mezzanine and second lien debt and likely some senior debt, the first investor said. “Nobody knows how much they own in the senior and at which price they bought it, which makes things quite complicated in a possible restructuring if they also own a blocking stake in the senior [debt].”

Goldman Sachs and Endemol declined to comment.

The Edam Acquisition consortium, comprising Goldman Sachs Capital Partners, Mediacinco Cartera SL, Cyrte Fund II B.V. and VI, L.P., acquired control of 99.7% of Endemol Investment Holding BV from Telefonica and other shareholders in 2007 for a total consideration of roughly EUR 3.6bn.

No deal on addbacks

Despite declining revenues related to reduced advertising spend, Endemol’s television programmes are still a hit in many countries and new shows are in the pipeline, a second distressed investor noted. “Nose bleed leverage is the real issue for this company,” he added.

The sponsors snuck under the financial covenants in Endemol’s debt package last year by repurchasing the very debt they sold to finance the acquisition at a discount and counting the related gains in the borrower’s EBITDA calculation.

The company added EUR 81m from discounted debt buybacks to EBITDA calculations in 2009. The add-backs helped to bring FY09 EBITDA used for covenant calculations EUR 30m-EUR 40m higher than the prior year, at EUR 250m-EUR 260m.

Lenders cried foul at the tactic and voted in February to send the company an official notice of censure. Goldman and its co-sponsors sued for peace by agreeing not to apply such addbacks in the future in exchange for a grandfather clause on all previous covenant calculations.

That puts the production company at risk of breaching covenants by 4Q10 or 1Q11. In 4Q10, Endemol’s net leverage covenant test ratchets down to 9.2x from 9.5x in September 2010, before ratcheting down again to 9.1x starting in September 2011. The group had around 1.5 turns of headroom on its leverage covenant and 0.8x on its interest coverage covenant, said the first investor.

The company had just under EUR 200m of cash on its balance sheet at end 1Q10 and revenues were flat on the same period in 2009, the two distressed investors said.

Opportunity knocks

A possible workout for the production company, which cashed in on the reality television boom in the late 1990s, could involve a cash injection, said a fifth source familiar. The equity could also be used for an acquisition, he added.

Despite facing shrinking covenant headroom, Endemol has set its sights on UK-based broadcaster Five, the first and a fifth source familiar noted.

The Dutch group is exploring possible acquisitions, including UK broadcaster Five, recently put up for sale by German media giant RTL, the first and fifth sources said. Endemol is being advised by Goldman Sachs.

There is some rationale in buying Five. “They could use it to keep on showing Big Brother in the UK,” the second investor noted. Last August, Channel Four, which shows Big Brother in the UK, announced that this year’s summer series of the reality show will be the last.

“Endemol has a long-running contract with Five, so this is a defensive move,” the fifth source said. “It wouldn’t be a large deal, no one thinks Five is worth [that] much,” he added. Five generated negative EBITDA of EUR 10m in 2009 and the business is touted at a valuation of EUR 150m.

If the Five sale process becomes protracted, Endemol could be a serious contender, the first source commented. Under the terms of its loan agreement, the group could partly finance a buyout of Five by drawing on its EUR 150m revolver and EUR 300m capex facility, said the two investors.

The production company is not in a position to stump up the cash immediately, the second investor noted. Endemol would need to address its covenants before embarking on a strategic acquisition of Five, he cautioned. “They’re analyzing potential synergies between [television] production and broadcasting,” the fifth source said.


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