Cunningham One Cause Of Sinclair's Grief

Sinclair Broadcast Group spelled out Tuesday just how close it is to bankruptcy.

It faces debt covenant violations, sagging revenues and cash flow that may make it impossible to service that debt, and what could be contentious negotiations with ABC over its affiliation agreement, which expires at year end.

But the key and most immediate threat is the potential credit default of Cunningham Broadcasting Corp., with which Sinclair has local market agreements (LMAs) encompassing six stations.

That could push Sinclair over the edge as soon as the end of July.

"The immediate event that rolls the rock downhill is Cunningham," said one analyst who spoke on the condition of remaining anonymous. "But it's such a peculiar situation, I have no idea how to handicap the likelihood of bankruptcy."

Cunningham, which has at least two of the same lenders as Sinclair and which is controlled by members of the Smith family other than those who control Sinclair, has already defaulted on a $33 million term loan but obtained a reprieve from lenders until July 31.

In documents filed Monday with the Securities and Exchange Commission and in remarks during a conference call with investors Tuesday, Sinclair provided a road map of how many paths lead to bankruptcy. Cunningham clearly is key.

If Cunningham fails to meet that July 31 repayment deadline, the hammer likely falls -- not only on Cunningham but also on Sinclair.

"You talk about bankruptcy in your 8-K and you have a bankruptcy lawyer on the call," noted Marci Ryvicker of Wachovia during the conference call. "It sounds like your own bankruptcy could be triggered by Cunningham's bankruptcy."

"You're getting it right," acknowledged Sinclair CEO David Smith.

Under FCC regulations, Sinclair apparently would not be permitted to simply repay the money Cunningham owes.

"Why is this just being brought to light now," one caller asked.

"I guess it has to do with the fact that none of us were expecting the degree of this recession and likelihood of this happening," said Smith.

Cunningham's key lenders are JP Morgan and Wells Fargo. They happen to be Sinclair lenders as well. Sinclair's loan agreements with those entities include a cross-default provision: In effect, if Cunningham defaults, it triggers a default at Sinclair.

That cross-default would, in turn, compromise Sinclair's ability to address put options on $345 million in 3-percent notes that can be exercised beginning May 15, 2010, and put options on $143.5 million in 4.875-percent notes that can be exercised beginning January 15, 2011. The notes themselves are not due until 2027 and 2018, respectively.

Cunningham contributes about $77 million annually to Sinclair's revenues, including about $26 million in direct cash flow. Sinclair estimates its 2009 broadcast cash flow will be about $179 million. Although Sinclair is projecting mild improvement in revenues and cash flow for the year, a 15-percent hit clearly would put it in dire straits.

Even if Cunningham manages to renegotiate its loan, obtain a waiver or some other form of forbearance, Sinclair's not out of the woods.

Sinclair has been negotiating with holders of its 3-percent and 4.875-percent note puts regarding restructuring of the notes. Sinclair is contractually obligated to repay 100 percent of the purchase amount plus unpaid and accrued interest. Sinclair acknowledges in its 8-K filing that it has insufficient cash to meet such obligations. Failure to negotiate a restructuring of the notes or to pay the puts would trigger a default and a potential bankruptcy.

As the 8-K spells out, any resolution is further complicated by potential conflicts of interest. One segment of the Smith family -- David, Frederick and J. Duncan -- own a controlling interest in Sinclair and serve on its board. Another segment -- a trust established by their mother, Carolyn Smith, for her grandchildren -- owns a controlling interest in Cunningham. There are a number of other overlaps and interlocks delineated in the 8-K.

At the heart, the document states: "Key officers and directors have financial interests that are different and sometimes opposite from our own and we may engage in transactions with these officers and directors that may benefit them to the detriment of other security holders."

Smith stressed that a piecemeal approach to avoiding bankruptcy won't solve Sinclair's problems.

"It makes no sense to make a deal that takes care of threes [percent notes] only to have to deal with fours a few months later," he said. "We have to look at the capital structure on every level."

Sinclair's problems stem largely from its enormous debt load: $1.33 billion, including $428.9 million related to its bank credit facility. Like other broadcasters, the precipitous economic downturn has exacerbated Sinclair's problems. Steep declines in advertising revenues have compromised its ability not only to service its debt but also to obtain new financing, either from debt or equity, on favorable terms.