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Analyst Calls Sinclair Bankruptcy Threat "Posturing"

Sinclair Broadcast Group, one of the more aggressive proponents of cash for retransmission consent from cable and satellite TV operators, has been dropping hints that it could be forced into bankruptcy if negotiations with convertible debt holders are not completed. But one analyst who follows the company suspects that the broadcaster may be "posturing" in order to get the convert deal done.

Sinclair said in a filing with the Securities and Exchange Commission July 10 that unless it amends the convertible note agreement soon, it could be forced into bankruptcy protection. Holders of about $500 million worth of 3% and 4.875% convertible senior notes have the right to "put" that debt back to Sinclair in May 2010 and January 2011, which Sinclair has said it would be unable to pay. Sinclair has about $1.3 billion in total debt.

At the heart of the controversy is Cunningham Broadcasting, a six-station television group based in Baltimore that is 90% controlled by members of Sinclair CEO David Smith's family. On a conference call with analysts and investors Tuesday, Sinclair said that Cunningham is facing "significant financial challenges," and if the station group were forced into bankruptcy it could indirectly impact Sinclair's cash flow by between $24 million and $34 million.

The total blow to Sinclair could amount to between $50 million and $60 million, executives said on the call, including cost savings and general synergies.

Cunningham is an LMA (local marketing agreement) partner with Sinclair in six markets. In addition, Cunningham has a $33.5 million term loan (guaranteed by Sinclair) that was in default as of June 5. That default was waived on June 30 and the termination date was extended to July 31. Sinclair's bank credit facility also includes some cross default provisions that could be triggered by a Cunningham bankruptcy, which according to Wells Fargo Securities analyst Marci Ryvicker, could force Sinclair to renegotiate the LMA agreements with Cunningham or to seek a waiver of the cross-default provisions from its lenders. Sinclair management has not revealed which path it will choose.

Ryvicker wrote that Sinclair management is taking a holistic approach to both the Cunningham and covert issues, an appropriate tack given that the loss of $26 million in Cunningham cash flow would make it "nearly impossible to refinance the notes."

Adding to the predicament is that fact that Sinclair only has about $70.5 million available under its $175 million revolving credit facility.

Sinclair stock was down 5 cents (4.6%) to $1.05 per share in afternoon trading Wednesday. The stock has dipped 66% ($2.07 per share) since January.

"To be blunt, we think management is posturing," Ryvicker wrote. "We believe that management is painting the most dire scenario in a public forum as part of its negotiations with convert holders. There are still 10 months before these converts can be put to the company, so the real issue is what happens with Cunningham (which, by the way, is essentially owned by David Smith's mom). We think the possibility of a potential SBGI bankruptcy is remote, but that headline risk remains significant."

Sinclair Broadcast chief financial officer David Amy could not be reached immediately for comment.
Sinclair has been one of the more aggressive broadcasters regarding retransmission-consent negotiations and has been embroiled in highly public battles with cable operators, most recently Mediacom Communications. While advertising revenue has been hit hard this year due to the recession, retransmission consent revenue has risen - Sinclair led publicly traded broadcasting groups with $21.1 million in retrans revenue in the first quarter.