Dirks, Van Essen and Murray chatted separately with five media bankers to discuss the present state of the lending market. The group of lenders were Vipa Chiraprut, Vice President, Wells Fargo; Frank Grueter, Senior Vice President, Citizens Bank; Kathleen Mayher, Executive Vice President, KeyBank; Tom Palmer, Managing Director, SunTrust Bank; and David Vanderlugt, Vice President, GE Capital.
DV&M: Let's start off with an easy one. What is it about the newspaper industry that is so attractive to lenders?
Palmer: The industry has predictable cash flows, limited competition, consistent valuations of 10-14x EBITDA and continues to be the most effective means for advertisers to reach the mass audience in a market.
Mayher: In general, I think it's safe to say that the industry's extremely low historical default rates and generally stable cash flows have made newspaper publishing the strongest performer of most banks' media loan portfolios.
DV&M: Are your institutions looking to build up their portfolio of newspaper loans vis-a-vis other media loans?
Vanderlugt: Yes -- publishing (which includes our magazine customers) currently represents roughly 20% of our portfolio, and is considered one of GE Media group's high growth areas.
Mayher: Newspaper publishing is the first media business that KeyBank began lending to over 70 years ago -- we now have $500 million in credit exposure in the industry and hope to grow even further over the next couple of years.
DV&M: How have lending multiples changed at all in the past few years? Are you becoming more or less discriminating with newspaper loans?
Vanderlugt: The market has probably retracted somewhat over the past couple years, putting lending multiples at approximately 5x. GE has consistently been at least as aggressive, and often more aggressive than the "market" on leverage multiples to community newspaper groups.
Grueter: Gone are the days of lending multiples routinely exceeding 5x cash flow, due to lower EBITDA growth rates. Citizens has always stayed away from transactions that we perceive to be over-leveraged; however, we will stretch for proven operators with a strong track record.
Chiraprut: Lending multiples have contracted somewhat since the heydays in the late 1990s and early 2000, but appear to have eased up a bit recently. Wells Fargo's lending multiples to community newspapers range between 4.0x to 5.5x, depending on the specific nature of the transaction.
DV&M: Do you determine the amount of the loan using a multiple of cash flow, a percentage of deal value or another metric? Why one over the others, if not a blend?
Vanderlugt: Our starting point is the current market leverage multiple, to which we apply a "sanity check" by looking at what percentage of the pro forma capital structure we would be. GE is typically comfortable lending at 50-60% of enterprise value.
Mayher: KeyBank looks at debt service capability/fixed charge coverage as the primary determinant of the appropriate leverage level for any company. Generally, we want to see a borrower pay back at least 70% of a loan within 6-8 years. This approach allows a lender to recognize the need for capital expenditures, distributions to shareholders, taxes and other uses of cash rather than assigning a predetermined lending multiple.
DV&M: What kind of criteria do you use to evaluate the attractiveness of a potential loan?
Palmer: Although there are many important criteria, we focus primarily on management team experience, the competitive nature of the markets served, revenue source diversification and balance sheet strength.
DV&M: Is the current lending environment more or less favorable than 5 years ago? 10 years ago?
Grueter: Five years ago, EBITDA growth rates were hitting double digits, and lending multiples were 1-2x higher than they are today. And 10 years ago, although the newspaper industry was emerging from a recession, the number of lending institutions serving the industry was significantly greater.
Palmer: In general, however, we think that newspaper publishers have maintained consistent access to the bank loan market despite the industry's recent ad recession.
DV&M: Any predictions for the future, in terms of the lending environment?
Grueter: Going forward, both the borrower and lender should benefit from improved cash flow levels. Although employment advertising levels have fallen significantly from their peak in the late 1990s, even a slight improvement will allow lenders to have more faith in cash flow forecasts.
Chiraprut: It appears that lending institutions have a stronger appetite to lend, after outstanding bank loans to media segments have contracted since peaking in 2000. There are new institutions getting into media lending, which should be favorable to the lending environment. With the economic recovery and expansion under way, we should see more acquisition activity and bank deals getting done in the market.