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Back to the banks

Call it the year of debt restructuring for the broadcasting industry. The slowdown in TV ad sales is making it difficult for many broadcast borrowers to meet the terms of their loans, so they are seeking amendments from lenders or are redoing agreements altogether.

Sinclair reportedly has asked J.P. Morgan Chase to restructure a loan package that is in danger of default. The company wants the lender to reduce the principal from $1.75 billion to $1.1 billion, with more time to pay it back, in exchange for a higher interest rate.

Financial types say it's unusual for a lender to reduce the principal on a loan, unless it's sure it won't get paid back and doesn't want to go through the trouble of taking possession of the defaulter and liquidating. Sinclair CFO David Amy didn't return calls for comment.

Sinclair's restructuring request came just weeks after Goldman, Sachs & Co. came to the rescue of what an Wall Street analyst called Granite Broadcasting's "financial distress" with a new $205 million credit facility. NBC, too, modified the terms of a 10-year $362 million reverse-compensation obligation that kicks in next year.

Last week, Ackerley Communications acknowledged in an SEC filing that it would have been in technical default on a loan if its $200 million sale of the Seattle Supersonics basketball team didn't close by April 15. The sale closed last week, giving Ackerley some financial breathing room.

Lenders usually require broadcasters to agree to covenants, or promises to meet certain revenue or earnings targets, to maintain certain debt to cash flow ratios, or even not to buy or sell certain assets. If those promises are broken, the loan goes into technical default, and the lender can force the borrower to pay up on the spot. What usually happens, though, is a borrower who is close to violating one or more covenants will seek waivers to avoid default. According to its SEC filing, Ackerley amended its agreement seven times before closing its Supersonics sale last week.

Acme Communications, the WB station group controlled by The WB TV Network founder Jamie Kellner, and Benedek Broadcasting have also asked for waivers to certain loan covenants to avoid being in technical default on their loans.

And Wall Street has an eye on Young Broadcasting, which has more than $1 billion in debt and recently advised analysts that first-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) would dip 25% to 29%. Young has acknowledged that earnings for KCAL-TV Los Angeles are down significantly, as are most of the market's stations, which has been particularly hard hit by the soft advertising climate.

Young Broadcasting CFO James Morgan said the company remains within existing covenants of its loans. But he declined to discuss whether it has plans to restructure its debt anytime soon.

Don't be surprised to see lots of other TV and radio stations amending their loan agreements, said Bishop Cheen, broadcast analyst at First Union Securities. "This is a tough year. Can you name one broadcaster whose debt-to-EBITDA ratio is going down this year? I can't." There may an exception or two, he added.

Banks are under pressure from the Fed to "screen the quality of their credit a little more," he said, noting that banks see broadcasting as a riskier business to lend to now than 18 months ago, so interest rates to stations will rise.

Lee Westerfield, broadcast analyst at UBS Warburg, says lenders have been lowering broadcast-station valuations for six months now—something he finds ironic "given the likelihood of deregulation" by the current FCC.