The threat has grown rapidly.
Just two weeks ago, on Sept. 30, Fitch Ratings was optimistic that most big media companies would be able to service their debts through 2010, saying that Walt Disney Co., News Corp., Time Warner Inc. and Viacom Inc. were all well-positioned--provided that they continue to generate cash flow at current levels.
This estimation was followed, however, by big downward revisions of earning forecasts by Viacom and CBS last Friday. Viacom said it was lowering its third-quarter ad revenue forecast by 3% and earnings by 10%. CBS disclosed that it will take a $14 billion goodwill charge to reflect the loss in value of its TV and radio stations.
All this will affect Viacom's ability to pay down its debt, which grew by about $1 billion between December 2007 and June 2008, to $9.24 billion. Interest payments grew to $213 million in the second quarter, compared to operating income of $792 million and net earnings of $406 million.
With interest payments already over 50% of net earnings in proportional terms, a sharp downturn in earnings could force Viacom to restructure its debt--if any banks are willing to help.
The case of Viacom also highlights the additional threat posed by big media companies' investments in each other, setting the stage for chain reactions triggered by selloffs. This interdependence was illustrated by Viacom Chairman Sumner Redstone's decision to sell $233 million of Viacom and CBS stock owned by his National Amusements theater chain to make debt payments required by that company's covenants with lenders. Redstone's announcement caused Viacom's stock to tumble 17% on Friday, although it has subsequently rebounded.
While there is no official revision from either company, analysts have also lowered third-quarter expectations for Disney and News Corp., based on the worsening outlook for ad revenues in the midst of economic turmoil. They have also expressed concern about Clear Channel Communications and Univision; both assumed large amounts of debt in leveraged transactions ($8 billion and $10 billion, respectively) before the financial crisis gathered speed.
Smaller radio players are also having a rough time.
Westwood One, a leading news content producer and distributor, said Monday that it is in talks with Bank of America and JPMorgan Chase to restructure $85 million of debt set to mature next year, amid a collapse in its stock price. Chief executive Thomas Beusse admitted in an interview with Bloomberg that "the market has largely bet that we wouldn't be able to refinance, which is why our stock price has fallen, we think."
Also this week, Spanish Broadcasting System said it was unable to borrow $10 million of a $25 million credit facility promised by Lehman Bros. due to the lender's declaration of bankruptcy. SBS said in an SEC filing that it needed the money to pay a promissory note.
The situation is even worse for newspapers.
Tribune Co., which owns the Los Angeles Times, is increasingly at risk of defaulting on the large debt--currently about $7.5 billion--that it acquired last year in a transaction engineered by Sam Zell to make the company an employee-owned business. Fitch Ratings and Moody's Investors Service both recently warned that a 10% decrease in operating cash flow could violate Tribune's lending covenants, which require the company to maintain a ratio of debt to cash flow of no more than 9-to-1, lowering to 8.75-to-1 in 2009. This will intensify pressure to cut costs and generate cash by selling assets like the Chicago Cubs and Tribune's substantial real-estate holdings.
McClatchy and Gannett have also run into trouble as they try to amend their borrowing agreements with banks that were once trigger-happy but have since grown gun-shy. Overall, banks are raising interest rates by 1.64% to restructure debt--the highest level since 1997 and eight times the rate charged in the first half of the year, according to Standard & Poor's.
But the rate is even higher for McClatchy, which agreed to a rate hike of as much as 2.25% to adjust its loan agreements in late September, according to Bloomberg. The new covenant allows McClatchy's debt to rise to 7 times cash flow, up from 5 times.
Analysts say Gannett may also find it impossible to participate in the federal bailout of credit markets. That's because the bailout fund, per the terms dictated by legislators and regulators, will only buy commercial debt that has a top rating from one of the three main credit rating firms: Standard & Poor's, Moody's and Fitch.
As expected, the credit crunch has sharply depressed the merger and acquisition marketplace. According to the Jordan, Edmiston Group, which handles a variety of M&A transactions involving media companies, the total value of M&A activity in the first three quarters of 2008 was down 70% compared to the same period in 2007--dropping from $87.6 billion to $26.7 billion. However, smaller deals continue at a brisk pace, with 619 total transactions so far this year, compared to 636 in the same period last year.