Debt financing of newspapers in the post-recession era
Charles Dreifus currently heads Charles J. Dreifus & Associates LLC (“CJDA”), which he established in 2010. The firm is engaged in financial consulting and advisory to middle market media companies and financial institutions. Recent assignments have included debt placement, debt restructuring and trusteeships. Dreifus was formerly Managing Director/Sector Head, Media Finance of CIT Group. Employed by CIT and its predecessor companies from 1992 to 2009, he was appointed to the most recent position in 2004, charged with P&L, new business development, risk/workout, transaction underwriting and portfolio administration. He structured more than $3 billion in customized senior debt financing solutions to middle market media companies during his tenure, ultimately building a sustained $1.3 billion portfolio of loans. Prior to joining CIT, he spent 12 years in various commercial lending positions at Chrysler Capital, U.S. Leasing and Ford Motor Credit. He holds a BA in Economics from the University of Michigan and an MBA in Finance from the Boston College Graduate School of Management. Professional licenses include FINRA Series 7 and 63. DV&M recently spoke with Dreifus about the state of debt financing of newspapers in this new era.
Chuck, you have been around media lending your entire career. What’s changed since the Great Recession?
Prior to the recession, credit availability was virtually unlimited. Lenders were aggressive in lending to consumers and businesses. Newspaper publishing, as well as other traditional media sectors, were widely sought after by lenders because of their ability to generate robust cash flow margins. It was not unusual for lenders on traditional senior loans to lend up to 5 times EBITDA (earnings before interest taxes depreciation and amortization), the primary standard of measuring cash flow. Many banks and finance companies had dedicated media practices that actively competed for newspaper industry business.
Since the recession, obtaining debt for small and middle market companies has become difficult. Those financial institutions that continue to lend to media companies generally target larger entities, only willing to lend modest levels of leverage. The widely reported problems in the newspaper industry coupled with losses experienced by lenders within their respective portfolios of newspaper loans resulted in credit markets moving away.
Is the market different for the newspaper companies that have long histories with a lender?
Many newspaper publishers with existing credit facilities are experiencing various problems with their existing lenders. For instance, companies that refinanced their debt prior to 2007 are at, or nearing, their maturities. While these companies may have been in compliance with their existing credit facilities, they are unable to meet the more stringent requirements and higher operating performance levels that are demanded by lenders in the current lending environment.
A serious problem arises with companies that are in the later years of their credit facilities. Many of these facilities require increased amortization levels in the later years. Acquisitive companies in the recent past refinanced every few years as they continued to purchase additional publications. They assumed this trend would continue and that the ramped up amortization would be deferred. Other publishers forecasted that based upon then current operating trends, that sufficient cash flow would be generated organically to contend with the increased amortization. These companies now often have diminished operating performance and are unable to meet the contractual requirements of their loans.
Since you left your banker role and started your company what sorts of assignments have you been working on?
Over the past four years we have worked with companies that are out of covenant compliance or in payment default. The scenarios described above contributed to the problems incurred by these companies. They were unable to meet the payment obligations stipulated by their credit facilities. Some financial institutions understand the current operating paradigm of the newspaper industry. Others do not, or are under internal or regulatory pressures to drive an outcome. We have served as advocates for borrowers to negotiate with their lenders. Often an explanation of the industry realities and the suggestion of constructive alternatives allow for a mutually beneficial renegotiation of the credit facilities. In other situations aggressive negotiations coupled with prudent legal representation is required. The negotiations are not easy and often quite tense. A third party intermediary can facilitate more productive negotiations.
The steep revenue declines for the industry between 2009 and 2011 seem to be behind us. Are lenders now looking at the business differently?
The lending industry is slowly beginning to change its mindset relative to the newspapers. Three years ago, newspaper loans were widely viewed as toxic. However, with the advent of high profile investors making significant acquisitions, some institutions are willing to consider new opportunities.
Most conventional banks are not willing to consider loans in excess of 50% of a company’s capitalization. Some banks are still precluded from considering a newspaper loan irrespective of the strength of the transaction. Generally banks are more interested in considering lending opportunities for companies that are located in their geographic footprint. However, even having geographic proximity is no guaranty of attracting a bank. Our experience has been that typically several lenders must be approached to find an institution that might have an interest in considering a loan. Generally borrowing from a bank affords the least expensive source of financing with interest rates in the 3% to 6% range depending upon the strength of the transaction. While the interest rates are attractive, these loans require rapid amortization and terms limited to between three and five years. Financial covenants with these loans are also tighter and do not allow for much deviation from forecasted financial performance.
If traditional bankers aren’t willing to lend to newspapers where else can you find newspaper-related financing?
The non-bank segment of the lending industry has become interested in newspaper lending. This is a segment comprised of funds or finance companies that specialize in either uni-tranche lending or mezzanine lending. These lenders are willing to consider more highly leveraged loans as compared to a commercial bank. In other words, they will consider a loan that exceeds 50% of the capitalization of a company. Uni-tranche lenders are more expensive than traditional banks, charging interest rates ranging from 9% to 15% depending on the merits of the proposed loan. They typically have a minimum a loan requirement of $10 million. In addition to being more aggressive in their lending levels, uni-tranche lenders offer more lenient covenant requirements, lower levels of amortization and longer terms.
Mezzanine lenders are also willing to consider more risky loans. They specialize in a space between conventional bank debt and equity. Mezzanine lenders typically pair with a bank to meet a company’s borrowing needs. The bank will lend on a relatively conservative basis. The mezzanine lender will meet the remaining borrowing need required. The bank will have a primary, or first lien position in such a loan. This means that in the event of foreclosure, the bank has first right to any proceeds of the disposition of a company’s assets. The mezzanine lender is granted a second position and is not able to recover its investment until the primary lender is fully satisfied. Mezzanine lenders typically charge interest rates in the mid- to high-teens. All debt amortization is paid to the primary bank. The mezzanine lender is allowed current pay interest; however in some situations will defer a portion of the interest until after the senior lender is paid. The blended rate of the first lien and mezzanine lenders is generally equivalent to a uni-tranche lender.
Debt financing in the current environment remains challenging. There are, however, financing vehicles in the marketplace to meet the borrowing needs of newspaper publishers. The right source of debt is dependent on the specific needs of the company. Aside from the economics of a loan, it is important to find a lender who is willing to embrace the industry and will constructively work through issues.
Chuck Dreifus can be reached at 248-792-3926 or firstname.lastname@example.org