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Cumulus debt restructuring proposal announced!

Topics of general interest that just don't fit anywhere else.
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MWmetalhead
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Cumulus debt restructuring proposal announced!

Post by MWmetalhead » Tue Nov 14, 2017 6:44 pm

From a liquidity standpoint, third quarter 2017 was a DISASTER.

The company went from an unrestricted cash balance of $141 million as of June 30, 2017 all the way down to a paltry $69 million as of September 30. Bear in mind this is BEFORE giving effect to the $50 million check Cumulus had to recently write to Merlin Media to complete its purchase of WLUP and WKQX.

So, at this point, Cumulus' cash coffers are probably holding less than $20 million in Cash, unless they advanced funds under their asset securitization credit facility.

This certainly explains why the company elected to default on its November 1 semi-annual interest payment (totaling $23.6 million) as to its senior notes!

Within the last 24 hours, Cumulus posted a detailed 8-K with the SEC describing in detail the pre-packaged proposal they plan to present to debt holders for a vote. Initially, Cumulus is going to try to give this a go on an out-of-court basis. That could prove challenging. To make that work, bond holders representing 98% of outstanding bonds will need to agree to tender their notes.

Did I add that such consent (not to mention consent from the syndicate of lenders holding the $1.7 billion in term debt) needs to occur by NOVEMBER 30 to keep Cumulus out of bankruptcy? That is, unless the bond holders agree to enter into a forbearance with Cumulus. Usually, though, a forbearance is something you see with bank debt, not with bond debt. I am unaware of any situation where corporate bond holders have granted an out-of-court forbearance (beyond the standard payment grace period built into the bond indenture).

If the out-of-court proposal is adopted, here's how the debt stack would change:

Today's debt stack
*$1.73 billion Term Loan due December 2020, priced at LIBOR + 3.25% or Base Rate (essentially, Prime) + 2.25%. LIBOR is subject to an index floor rate of 1.0% and the Base Rate is subject to an index floor rate of 2.0%. Chances are, most of the facility is priced at LIBOR + 3.25%. Given the fact LIBOR is currently around 1.25%, that means the current effective interest rate is about 4.50%.
*$610 million in 7.75% senior notes (or "bonds") due May 1, 2019.

The company also has a $200 million revolving credit facility with zero balance (they cannot advance on this even if they wanted to) and a $50 million asset securitization facility (zero balance as of 9-30-17; cannot say with certainty if that balance is still $0 or not).

Out-of-Court Proposal
*The $1.73 billion Term Loan would be paid down to $1.38 billion, less any "Excess Cash" that can be applied toward the current balance upon emergence from restructuring. It is unclear how Cumulus is defining "Excess Cash."
*The $350 million pay down would come from new equity capital infused by current bond holders. It is unclear from whom the funds would come. Crestview? Another private equity group? The Dickeys?
*The new Term Loan, presumably, would still mature December 2020 but would (a) be priced at LIBOR + 6.00% and (b) be secured by additional collateral (not specified) that is currently unencumbered. (I presume this could mean any combination of receivables, equipment, and real estate. I am too lazy to pull up the 12-31-2016 Form 10-K to see what is included in the existing collateral package.)
*The folks who hold the $610 million in 7.75% senior notes would convert all of their debt to EQUITY and would receive a 97% equity interest in Cumulus.
*The A/R Securitization facility for $50 million would remain in place unfettered.
*The existing Revolving facility would be extinguished (remember, there is $0 outstanding under it right now). However, the Company may choose - with consent from Required Noteholders - to enter into a new Revolving facility or a new ABL Credit facility. The notion of a new revolving or ABL facility is depicted as a "nice to have" as opposed to a "must have" component of the out-of-court proposal.

It appears Cumulus' board wants creditors to sign up for the out-of-court proposal. They must have a comfort level with the current holders of the bond debt. How much is held by members of the Dickey family? That is the $64k question! Sure would love to know the answer.

Incumbent Term Loan lenders - led by JP Morgan Chase - would receive a nice 20% curtailment, a hefty 275 basis point increase in interest margin, additional collateral, would no longer have any debt holders behind them in line, and would not be required to extend maturity.

Cumulus, meanwhile, would get additional time to execute its turnaround plan, would not be forced to liquidate any assets, and would avoid an embarrassing, costly and risky in-court proceeding.

Oddly, the out-of-court proposal does not really address the company's liquidity situation!!! OK. So let's say the $350 million comes in the door. If every penny of that is used to pay down Term Debt, the company has not improved its liquidity situation at all.

A $20 million starting cash balance + $50 million of asset securitization facility availability is NOT much in the way of liquidity for a company the size of Cumulus. This means the company will operate with an even greater spendthrift mentality than before, and I would expect a new round of personnel cuts.

Trailing 4-quarter funded debt to EBITDA is something like 11x right now. That is sky high. Usually, for a mature to declining industry, that number needs to be no higher than 5x and preferably no higher than 4x.

If the out-of-court plan is approved, the $2.3 billion funded debt load drops to $1.3 billion. That means the company would still be carrying 6 turns (stylized as "6x") worth of leverage. That's still pretty darn high, and only moderately better than iFart's recent leverage ratios.

Closing thoughts: The out-of-court proposal in & of itself is not a realistic long-term solution. Rather, it is designed to give the company a couple more years to maybe 30 months to further execute on its "turnaround." Cumulus' hope is that the competitive landscape changes sufficiently by then to make their business model more viable. If the main studio rule is revoked, costs can be brought down, operating leverage can be reduced, and unneeded real estate can be liquidated to raise cash. As an additional lever, the Company can look to restructure existing contracts with upper & middle managers to save some $$$.

If Funded Debt to EBITDA can be lowered to 5x or less by early 2020, the Company will be on better footing to deal with its maturing Term Debt. Maybe it can refinance on a conventional basis without having to resort to bankruptcy at that time.

I will say this - the Company does not do a convincing job in its 8-K materials of explaining how it plans to grow EBITDA to $270 million by 2020. This is probably by design. Generally, nitty gritty strategic details are not shared in public filings. Instead, these will likely be explained in a private-side presentation that one of Cumulus' advisory firms will likely prepare and present to institutional debt holders.

The Term lenders will go for the out-of-court proposal because they'll like the 20 percent permanent pay down, the increased juice, and the additional collateral. (Their support will be moot, though, if the bond holders do not get on board in adequate number.)

Bond holders? Tough to say. Again, it all boils down to who holds the bond debt. Getting 98 percent support is a tall order.

Later this evening, I will summarize and discuss the pre-pack option that Cumulus presents in its 8-K filing.
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MWmetalhead
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Re: Cumulus debt restructuring proposal announced!

Post by MWmetalhead » Tue Nov 14, 2017 8:11 pm

Per annum debt service savings under the out-of-court proposal:

Elimination of $350 million in Term Debt currently priced at roughly 4.50% = $15.75 million
Elimination of $610 million in Bonds currently priced at 7.75% = $47.275 million
Less: additional 2.75% spread on the $1.38 billion in remaining Term Debt = ($37.95 million)

= a hair over $25 million / annually.
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Re: Cumulus debt restructuring proposal announced!

Post by Otter Mii-kun » Tue Nov 14, 2017 10:52 pm

With the fact that Cumulus had its cash balance fall by roughly half during the previous quarter, combined with their purchase of WLUP and WKQX from Merlin, and the many other factors you explained (particularly with the leverage multipliers), I really can't see the proposed out-of-court debt restructuring as being successful at all, even if they end up cutting their personnel levels to the bare bones. At best, it'll only delay the inevitable.
*The folks who hold the $610 million in 7.75% senior notes would convert all of their debt to EQUITY and would receive a 97% equity interest in Cumulus.
Not really surprising at all that companies as deep in debt as Cumulus end up having their (secured) creditors receive a large controlling interest as part of debt restructuring. This sounds similar to what happened with Granite Broadcasting (former owners of WDWB/WMYD Detroit) as a result of their Chapter 11 reorganization-the secured debt holder(s) ended up with a controlling interest in that company.

Even if this out-of-court plan works in any way, I think it's safe to say that Cumulus is one unforeseen circumstance away from being dragged into federal bankruptcy court. (Again, Granite had a completely unforeseen event drive them into bankruptcy: Already being deep in debt by 2005, their proposed sale of then-The WB affiliates WDWB and San Francisco's KBWB (now KOFY-TV) to AM Media Holdings collapsed when both stations were left out of joining The CW in favor of their respective markets' UPN outlets. They later attempted to sell to DS Audible, but that deal eventually failed as well.)

Bottom line: No matter which way you want to look at it, Cumulus will burn through that ~$20 million in no time at all.
Isn't it nice how deregulation has brought us such oversized and dangerously overleveraged broadcast owners? (Yes, I'm looking at YOU, Sinclair, Nexstar, Cume-U-Less, and iFart!)

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Re: Cumulus debt restructuring proposal announced!

Post by MWmetalhead » Wed Nov 15, 2017 7:21 pm

Recall from my initial post that the out-of-court restructuring proposal included the following:
-$350 million in newly contributed equity capital would be used to reduce outstanding Term Debt from $1.73 billion to $1.38 billion
-Term Loan interest rate would be increased from LIBOR + 3.25% to LIBOR + 6.00%
-Term Loan maturity would remain unchanged at December 2020
-The $610 million in 7.75% bond debt (maturity of May 2019) would be wiped out.
-Existing bond holders would receive a 97% equity stake in the company
-The $200 million Revolver would go bye-bye, may or may not be replaced, and the $50 million A/R securitization faciltiy would stay in place.

Now, here's what the pre-packaged Chapter 11 term sheet looks like.

Cumulus, supposedly, would pursue attainment of Restructuring Support Agreements from a large bloc of its current debt holders for this proposal in the event the out-of-court proposal fails to gain sufficient support. (Remember, Cumulus would much prefer an out-of-court resolution, so it should come as no surprise that the following pre-pack terms are less attractive from the standpoint of the senior secured creditors who hold the $1.738 billion in term debt.)

Pre-pack term sheet:
-Term Loan would remain in place exactly as it is today. No pay down, no increase in pricing, no grant of additional collateral.
-The $200 million Revolver goes bye-bye, may or may not be replaced, and the $50 million A/R securitization facility would stay in place.
-Bond holders would either receive 97% to 100% of the equity in "new Cumulus," or alternatively, some "lesser treatment" if consensually accepted by such bond holder. (In this context, "lesser treatment" probably means a new debt instrument at a fraction of par value of current debt or a cash payoff at a deep discount.)
-Unsecured claims would basically survive and remain on the balance sheet upon emergence. These would be paid through ordinary course of business.

All the pre-pack would accomplish is kicking the can down the road. It would get the May 2019 bond debt out of the way so that no cross-default would be triggered as to the December 2020 Term Debt. Liquidity would remain tight for a while and Funded Debt to EBITDA ratios would remain in subprime territory (read: junk grade...not even remotely close to investment grade).

Cumulus is not worth $1.7 billion today. It's probably worth $1.1 billion to $1.4 billion. There are a LOT of risks in blowing up the company and trying to find buyers - either for Cumulus as a whole or Cumulus chopped up into pieces. What if the company is successful in growing EBITDA to $270 million annually? In that event, it would probably be worth $1.5 billion to $1.9 billion.
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Re: Cumulus debt restructuring proposal announced!

Post by Radio Sucks » Thu Nov 16, 2017 6:51 am

MW - Could someone with $250MM in cash and a history with the company swoop in during this process and regain his ownership position and control?
A radio columnist who sells a daily newsletter (so I hope he doesn't sue me for quoting him) wrote:Lenders want Lew Dickey back – They were not unhappy with him in the first place. He never missed a debt payment. Paid down $300 million in debt during his tenure and has enjoyed close relationships with all lenders. Dickey has their support for regaining control. Marcus and the current board does not appear to enjoy the same show of support.
Dickey gets a multi-billion dollar company for a quarter of a billion – The $250 million he has raised can be a down payment to lenders who would then return him to run the company. Dickey is expected to buy debt and stock that will be very cheap at that point (the stock closed at $0.29 yesterday).

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Re: Cumulus debt restructuring proposal announced!

Post by MWmetalhead » Thu Nov 16, 2017 6:05 pm

The answer is - it's certainly possible!

The $250 million (or whatever amount he is able to offer) would need to be sufficient to make the bond holders go away and keep the senior secured term lenders at bay.

Given the fact the bond holders would receive only equity and zero cash under either of the two proposals offered thus far, a competing proposal from Dickey would certainly be enticing, especially if he were to offer the bond holders a minority equity stake (say, 49%) on top of a cash payment.

The key, then, would be to convince the senior secured lenders that the company has enough in the way of liquid resources to operate sustainably until their term notes mature at the end of 2020.

If he were to infuse $250 million as part of a reorganization, existing equity holders would get nothing or next to nothing, he could come away with a 51% or greater equity interest upon emergence, and the pre-petition bond holders would likely receive a large piece of the $250 million as consideration for extinguishment of their debt.

I've been involved in corporate bankruptcies (as a lender) where cash is infused as part of the plan of reorganization, and pre-petition 1st lien secured lenders are forced to roll their debt forward (into "new co") as-is with little to no pay down of any kind. So, a scenario where bond holders get a nice cash payment whereas senior secureds get little to no cash payment is not completely far fetched. This doesn't mean the Term Lenders would take such treatment lying down. If I were representing one such lender, I would argue that the enterprise value of Cumulus is less than the first lien secured Term Loan balance, and therefore, bond holders should receive little to no cash under the Plan. I would direct counsel to file objection motions up the wazoo against any proposal that seeks to use cash to pay bond holders over term lenders.

Now, if Dickey family members (or friends thereof) already hold most of the bond debt, then there really would be no need to use a portion of the $250 million to pay off bond holders. Instead, some could be used to pay down the Term Debt and some could be kept on the balance sheet as "dry powder" to compensate for the fact the revolving credit facility goes away.
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Re: Cumulus debt restructuring proposal announced!

Post by MWmetalhead » Thu Nov 16, 2017 6:20 pm

Another possible scenario to consider:

Let's assume for sake of argument that the out of court proposal and pre-pack proposal both fail. King Dickey has another option at his disposal (potentially).

If there is risk of a protracted bankruptcy where liquidity could reach precariously low levels, especially when considering professional fees and adequate protection payments to senior secured lenders, Louie Boy could offer to extend a DIP (Debtor-in-Possession) Credit Facility.

DIP Credit Facilities automatically are granted priming liens ahead of all pre-petition creditors. That means Lew would be first in line with regard to collateral rights, not the term lenders. This would give Lew greater control with regard to plan of reorganization terms, including but not limited to who appoints board members, executive compensation terms, etc.

A $200 million+ DIP facility is highly unlikely and unnecessary. The question is - did they already fork over $50 million in cash for WLUP & WKQX? If so, I could certainly a see a DIP facility in the $50 million to $75 million range as a possibility. The company needs a safety net to ensure it doesn't run out of cash during bankruptcy proceedings that could last months. This would still leave Lew with money to cut deals with creditors as part of part of plan negotiations.
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Re: Cumulus debt restructuring proposal announced!

Post by ftballfan » Thu Nov 16, 2017 10:59 pm

Sounds like Cumulus may be in worse shape than Sears!

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Re: Cumulus debt restructuring proposal announced!

Post by audiophile » Sat Nov 18, 2017 6:05 am

MW - I highly doubt 50 million has been forked over.

On Oct 24th they filed a transfer with the FCC, which needs FCC approval, but 45 million may have put into escrow somewhere in anticipation of sale.

The agreement says 5 million was put in Merlin's escrow account but that may have been in 2014.
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Re: Cumulus debt restructuring proposal announced!

Post by MWmetalhead » Sat Nov 18, 2017 9:28 am

Interesting.

If bankruptcy occurs prior to the FCC approving the transaction, then Cumulus will have no legal obligation to move forward. In order to move forward, an order from the bankruptcy court judge would likely be needed.

If the FCC approval occurs less than 90 days prior to bankruptcy, then things get messy. Senior secured creditor may allege that the $45 million or $50 million payment constitutes a "preferential payment," and therefore, should be "clawed back."

A good synopsis of what qualifies as a preference payment and valid defenses against accusations of preference payments is found here:
https://bernsteinlaw.com/publications-l ... ptcy-code/

In my view, a strong argument can certainly be claimed that the transfer of WLUP and WKQX's assets to Cumulus constitutes "new value" to Cumulus. This would be the argument Merlin Media would make in support of the transaction. The fact Merlin Media is selling both stations to Cumulus at a price significantly less than fair market value (based on comparable sales) is another attribute that favors Merlin Media.

If the BK filing occurs first, this little situation could work to Dickey's advantage. He could say - "look, I'll finance the acquisitions of WKQX and WLUP with a DIP facility, so that it will be liquidity neutral."

One thing I didn't mention earlier - even though the revolving credit facility at present has a $0 balance outstanding, there may be Letters of Credit issued under the revolver. A letter of credit is a contractual right to receive cash from the issuer in the event the applicant - i.e. Cumulus - fails to perform certain contractual requirements or becomes insolvent. Technically, a letter of credit is a contract between the holder of the letter of credit (i.e. the beneficiary) and the issuer of the letter of credit (in this case, likely JP Morgan Chase). If a letter of credit is drawn, then the applicant is obligated to reimburse the issuer for the draw amount, plus interest and fees. Commonly, such reimbursement occurs by way of automatic draw against the revolver.

Bankruptcy can be - but is not always - an event that gives the letter of credit beneficiary the right to demand payment from the issuer.

If any number of these letters of credit get drawn - or are at risk of getting drawn - during bankruptcy, that increases the probability that DIP financing will be necessary.
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