Wells Fargo media analyst Steven Cahall told clients Tuesday that he believes Sinclair Broadcast Group’s regional sports networks could face a “tumultuous” period over the next few months, as uncertainty mounts concerning its upcoming carriage renewal with Dish Network and its ongoing battle with streamers YouTube TV and Hulu Live.
Sinclair’s RSNs, which were rebranded on April 1 as Bally Sports Networks, have been under the gun lately, after they failed to reach carriage deals with YouTube TV and Hulu before Opening Day of the Major League Baseball season. Now the networks -- which are housed under the umbrella of Diamond Sports Group -- are facing another potential battle as carriage negotiations with Dish Network are expected to start in the coming months.
Dish dropped 16 former Fox Sports RSNs in July 2019, shortly before Sinclair acquired the networks in August 2020. In a research note, Cahall wrote that he believes a deal eventually gets done, but will depend on the liquidity situation at Diamond. If Sinclair is able to favorably recapitalize the holding company -- which it is in the process of doing -- it should have the upper hand in talks with the satellite TV company. If not, Dish would have the advantage.
But Dish has managed to survive for more than a year without the channels and has a reputation for taking an extremely hard line when it comes to sports channel carriage. That could also play a role in negotiations.
“Dish is arguably the toughest MVPD negotiator and has financially benefited from dropping the RSNs,” Cahall wrote. “Thus, we believe a deal is likely, but our best guess is Dish returns with some sort of win/win partnership. Time will tell.”
Dish did not immediately respond to a request for comment.
Sinclair and Diamond first started to try to restructure its debt in October. Now, according to Bloomberg, Sinclair is entertaining creditor proposals to restructure the debt and was close to new marketing deals with other sports betting companies.
According to Cahall, Bloomberg said that Diamond is in talks with creditors and outside investors on a number of issues, and one proposal by its unsecured creditors would have them pumping at least $500 million of new cash into the company and exchanging their bonds for new debt with tighter covenants. Other secured lenders have proposed a $500 million term loan which Sinclair could use to exchange existing unsecured debt.
If that comes to be, Cahall wrote that Sinclair’s $1.7 billion in unsecured debt (out of about $8.1 billion in total obligations) would become secured. That gives debtholders a little more security, especially in the event of a liquidation. Diamond’s liquidity is an issue -- Cahall estimated that it would run out of cash in 18 months if nothing is done -- and in the early stages of the negotiations six months ago, bankruptcy was an option that was being considered.
“The unsecured bonds are trading at $48 - a steep 52% discount,” Cahall wrote. “Given our latest EBITDA and FCF outlook for Diamond the cash starts to run out in the next 18 months. That's both a bad backdrop for renegotiating with Dish - thus a self-fulfilling negative prophecy - and if liquidity issues were to ultimately push Diamond into a liquidation, the unsecured lenders would likely not receive much recompense. Therefore, a haircut today with future security is arguably a positive outcome for these lenders.”
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