Borrowing in a Time of Credit Crisis
Lending terms have tightened, getting loans at favorable rates is even harder.
The credit crunch, which began in July 2007 as result of the subprime fallout and subsequent fall-out in liquidity, is pinching the magazine industry well beyond just magazine M&A. “You’ve got to spend money to make money” or so the old saying goes, and at a time when publishers are trying to reinvent themselves and investing in both online staff and technology (as well as buying new media companies), loans are necessary to fund the growth.
But getting those loans at a favorable rate is much harder than it was two years ago. “Lending levels and terms are much less liberal,” says Ray Shu, media team leader for GE Media, Communication and Entertainment Group, part of GE Capital Markets Inc. “Funded leverage (on both a senior and total basis) has dropped meaningfully.”
Previously, financing was available at up to 5.5x senior debt and up to 7.5x with a second lien for many publishing deals of scale ($15MM+ EBITDA companies), according to Shu. Average equity-to-total capital levels were typically in the 25 percent to 30 percent range. In today’s market, senior debt leverage levels are in the 3.5x to 4x range with total debt levels topping out at 5x to 5.5x. Average equity-to-total capital requirements are typically in the 45 to 55 percent range, says Shu.
“Gone are the days when the senior first lien piece was up in the fives and maybe a little bit more with the second lien or mezzanine,” says Chris Mangan, managing director and head of U.S. media finance with Stamford, Connecticut-based Bank of Ireland. “If you consider we’re a year into this credit crunch, leverage multiples are off at least a full turn at the senior and mezzanine levels.”
Publishers with multiple adjustments to their financial statements won’t have much wiggle room with loan terms. “Lenders are looking for clean financial statements—free of adjustments and/or add-backs, particularly for acquisition targets—and consistent, solid financial performance from the existing company,” says Tom Flynn, chief financial officer at Summit Business Media (which completed its last major refinance last July right before the credit market soured). “There is not as much flexibility in the market place on terms and conditions as there was in prior years.”
Publishers with existing loan agreements shouldn’t feel that their terms are locked in. “I have noticed that, for existing credit agreements, especially those that were negotiated prior to the credit markets becoming much more challenged, the lenders are holding you ‘to the letter,’” says Flynn. “There is a general feeling that banks are much more inclined to charge not just fees for changes and amendments but will also implement a re-pricing for what, in the past, may have been a rather minor change to an existing agreement. This can be frustrating to a business even with an existing agreement.”
What Lenders Look For
Still publishers that have positioned themselves with multiple revenue streams and emerging new media models are more likely to receive favorable terms which have always been differentiated depending on business model, scale of the company, competitive positioning, etc. An established publisher with a category-leading product offerings and scale is generally going to receive more favorable financing terms and conditions than a smaller, less-seasoned publisher with developing product offerings.
In the current environment, lenders and investors are placing more value on publishing companies with successful e-media and event businesses as part of their total company mix and as such are more willing to provide more favorable financing terms. Subscription-based and usage-driven revenue sources in particular are considered a valuable component, especially in the weaker advertising environment, according to Shu.
“Generally, in the b-to-b space, we look for companies with either the #1 or #2 position in their category that can deliver their content to audiences in a variety of ways, from print to online to in-person events such as trade shows or conferences,” says Shu. “The #1 or #2 position is important since in a slower economic environment, advertisers or sponsors with a smaller budget will typically gravitate toward the market leaders. A seasoned management team that has operated through various economic cycles is critical as well.”
Mangan says the most important consideration is diversity of cash flow. “Properties with single titles are the toughest to finance,” he adds. “Diversity of flagship titles and a complement of events and trade shows demonstrate that diversity of collateral, for a lack of better phrase. With the loss of eyeballs on the print side, you want to see the Web at least bridging that gap.”
But being a proven performer can go a long way toward a favorable relationship with your lenders. “You must continue to deliver the financial results as agreed to in your financing agreements,” says Flynn. “You have to focus on having your existing assets perform and continue to invest in assets with upside potential and take advantage of areas for consolidation to mitigate risk in sluggish economy. Remember, this is a challenging market for everyone right now. Once the market settles a bit, you want to be a proven performer whom the lending partners want to continue to do business with and help grow your business.”