06-30-07 | Printable Version

Borrowers Have Their Day

by Gretchen Gordon, Director, CIT Communications, Media & Entertainment

It's a great time to be a borrower, but be a smart borrower.

We are in a time of incredible capital availability, for both debt and equity. That seems like a good thing. Interest rates are reasonable, and structures are more flexible than at any time in the recent past. Lenders seem anxious to win customers so they are willing to provide flexible terms including extended amortization, limited or light covenants, and increased advance multiples.

Extended amortization makes it easier to service debt in the initial periods of a loan, with the anticipation that cash flow will increase over time and enable increased amortization in the future. Light or few covenants can make a facility easier for a borrower to adhere to as well as make the financial reporting simple. Increased advance multiples enable a company to either pay a higher price for an acquisition target, increase dividends to shareholders, or just have access for a rainy day.

This sounds fantastic but there are some pitfalls of entering into these arrangements. It’s wise to consider the consequences if the business does not perform exactly as planned.

If a company has extended amortization terms, planning on the business continuing to increase cash flow, thus enabling amortization in the future, it is possible that the cash flow may not grow according to plan. Then when amortization picks up, it will be difficult to service the debt.

It seems that the trend toward limited covenants is driven mostly by lenders’ competition, not necessarily by needs of the customers. On the surface this seems great for the borrower, but it can turn into a nightmare. If a lender provides a facility with a limited number of covenants merely to be competitive, the lender is going to be very attentive if any covenants are violated.

Typically a lender has a variety of covenants, which if violated cause the borrower and lender to get back together to discuss the business, understand what caused the violation and determine a game plan. If a lender has a limited number of covenants and a violation occurs, the lender might react more strongly than normal. This could be disastrous for a business.

We have also seen a trend of increased advance multiples enabling companies to carry more debt than they have in the past. This leads to increased or sustained high purchase multiples for acquisitions. Buyers that have access to more debt tend to be able to pay more for properties. While this all works fine during times of prosperity and solid profitability, any hiccup can cause serious problems in servicing the debt. No borrower wants to default.

While it may be a great time to be a borrower, it makes sense to still be a prudent borrower, even if debt capital is more available than in recent history. Pick your lender carefully. Hopefully this will be a long-term partnership, so look for lenders that have media experience.

It is also important to understand how a lender may react to adverse situations. How have they reacted in down cycles? The only real way to know is to talk to other borrowers. Just ask the prospective lender for references.

So what does the future hold? I think it is safe to say that borrowing terms for newspaper companies are as lenient as they have ever been. Considering this industry has demonstrated little if any revenue growth, it’s noteworthy.

I think it is possible that in the near term borrowing structures will tighten some as newspapers are in a transition period from being predominantly print media to multi-media businesses. It is likely that some newspapers that are highly leveraged will not execute as well as expected. This could end up dampening the credit market for this traditional media outlet.

Newspapers will have to continue to fight the perception that readership is falling. Print readership may be falling, but total readership is certainly not. Newspapers need to continue to be the go-to place for news whether that is in print, online or on a mobile device.

If newspapers transition effectively, ad revenues will increase, readership will increase, and businesses should see stable if not growing revenue and profitability. This should bode well for borrowing metrics in the future. The faster newspapers can transform themselves into the primary source for news, the more equity and debt providers will be interested in the platform. Newspapers can become growth businesses again.