Covenant Crisis Looming At Media General

Facing possible default on its debt covenants, Media General is working with lenders to amend those covenants over the next several weeks, company executives said during Thursday’s fourth-quarter financial results conference call.

James Woodward, VP-finance and CFO, said Media General’s debt to cash flow leverage ratio at year-end was 7.43 times, with a ceiling of 7.75 times.

The challenge is the ratio begins ratcheting down successively each quarter of this year and, under the current agreement with lenders, ends the year at 5.5 times.

Media General had about $658 million in debt at year-end.

“Our goal has been to refinance, however credit markets have been seized up for some time,” Woodward said. “Despite strong growth [prospects in 2012], we’re uncomfortable with our ability to remain within the covenants. We’re seeking modifications over the next few weeks to provide sufficient flexibility to operate in the current environment.”

In what appeared to be a warning of a worst-case scenario, Woodward said, “Our ability to execute our business plan … is tied to these covenants.”

Inability to successfully renegotiate covenants could put Media General at risk of bankruptcy. It’s a threat that some analysts have been discussing quietly since last year.

Media General shares fell 51 cents, or 9.3%, to $4.97, among the day’s largest percentage drops for stocks traded on the New York Stock Exchange.

Executives mentioned asset sales as one possible tactic for reducing debt. Marshall Morton, Media General president-CEO, cited E.W. Scripps’ purchase of McGraw-Hill’s four stations for $212 million last October as one model for valuing Media General stations in comparable markets.

Media General anticipates solid revenue growth this year thanks to a combination of political revenues, Super Bowl, summer Olympics and retransmission revenue growth. Media General projects that retrans revenues will increase 57% this year, or roughly $12 million, to about $33 million.

The problem, as it has been for many print-broadcast owners, is print. In the face of digital growth, print media revenues continue to decline, creating a drag on overall top- and bottom-line growth as well as cash flow.

The freefall in newspaper revenues was a key factor in dragging Tribune Co. and Freedom Communications into bankruptcy.

The cash flow constriction is particularly troublesome because that’s what companies often depend on to pay down debt.

One analyst asked whether Media General would be able to renegotiate the covenants before it issues its 10-K — full year financial results — for 2011 so that it can obtain a clean report from auditors. Auditors sometimes question a company’s ability to continue as a “going concern” when seeking to raise a red flag for investors. Thus, it’s key that Media General successfully renegotiate the covenants before issuing the 10-K.

In that case, “We can get a clean report,” noted Woodward.

Woodward and other company executives on the call, including Morton and John Schauss, VP-market operations, expressed confidence those negotiations will be successful.

However, Morton noted that while amending the covenants does not require a unanimous vote from lenders, extension of the dates the covenants would step down, becoming more restrictive, does.

“The thing that gives me confidence is that we’ve been in discussion with some of our lenders and the agent bank [Bank of America] … that we’ll find a solution that’s mutually acceptable,” Woodward said.