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Emmis struggling to stay in good stead with lenders

November 17, 2008

At first glance, Emmis Communications Corp. is in an enviable position as it weathers what may be the most challenging times in the history of radio.

It negotiated a favorable borrowing agreement with lenders in November 2006, well ahead of the subprime market meltdown that soon caused credit markets to seize up. It has $68 million in cash, and its $455 million loan isn't due to be paid back until 2013.

But it's not that simple. Company officials are feverishly slashing costs behind the scenes in hopes of staying in compliance with leverage limits in that agreement.

If Emmis falls out of compliance, lenders could force the company to renegotiate terms, likely resulting in higher fees or interest rates. More daunting — but less likely, analysts say — lenders could shove the company into bankruptcy court.

Though some industry analysts say Emmis may violate leverage covenants sometime next year, company officials refuse to wave the white flag.

"I don't think the analysts are fully aware of all the expense cuts we have taken as a business," Chief Financial Officer Patrick Walsh said. "Internally, we continue to project compliance."

What's beyond dispute is that the company has little margin for error, even as it wrestles with an advertising slump that's been most severe in the nation's biggest cities — where Emmis generates the bulk of its radio revenue.

The company is required to keep its debt at less than 6.5 times its EBITDA, or earnings before interest, taxes, depreciation and amortization. The company says that, at the end of August, the ratio was 5.9.

Emmis will have even less breathing room come May, when the maximum leverage ratio permitted under the agreement drops from 6.5 to 6.

All of which explains why the company is on a cost-cutting binge.

In August, Emmis cut 40 jobs in its publishing division — which produces Indianapolis Monthly and other city magazines — and trimmed salaries for the remaining 348 workers by 2 percent.

This month, the company laid off 29 full-time and six part-time workers in its radio division, shrinking its work force to 614 full-timers and 311 part-timers. In addition, it snipped 3 percent off salaries of corporate and radio employees earning more than $50,000 a year.

It's also using the proceeds of the sale of a New Orleans TV station to pay a portion of executives' salaries — a move that holds down the company's operating costs, as defined in the lending agreement.

And the company is giving up a Gulfstream jet it leases and scaling back travel overall. Emmis plans to exercise an option to buy the aircraft for $14.4 million, then hopes to sell it for more than that. By ending the lease, Emmis also will recoup a $4.2 million deposit.

Analysts say the company needs to continue to scour for cost savings, but believe those efforts may not be enough. The pessimism among investors has knocked the price of Emmis shares to a mere 39 cents apiece.

Last month, Moody's Investors Service downgraded Emmis' debt, saying the company's ability to remain in compliance with covenants is "highly uncertain" in light of "the slowdown in consumer spending, its impact on corporate profits, and the resulting cutbacks in advertising and budgets by several industries."

The slump is affecting all of Emmis' 23 U.S. stations, but is especially severe in New York and Los Angeles — which account for half of Emmis' U.S. radio revenue. The company's L.A. revenue in the latest quarter tumbled 13 percent, even worse than that market's overall decline of 11 percent.

"In small markets, the clients [themselves] are buying radio — they're closest to the business," CEO Jeff Smulyan said during a conference call with analysts last month. "In the large markets, the ad agencies are saying, 'Gee, radio is over.' That's the biggest challenge we have."

Walsh said the company will consider all options to remain in compliance with its lending agreement.

One of the best, analysts say, is to sell off radio stations. CL King analyst James Boyle figures Emmis could fetch more than its entire debt by selling four stations in major markets.

The downside, of course, is that Emmis wouldn't have the benefit of owning those stations when the industry rebounds.

That's assuming it will rebound, of course.

Smulyan, for one, is keeping the faith. He's fond of pointing out that the problems facing radio are largely based on perception. He notes that stations nationwide still attract 260 million listeners a week.

In an impassioned memo to Emmis employees last month, Smulyan thanked them for their sacrifices and said "delivering for our advertisers and listeners and readers during a tough time like today will result in winning big in the better times of tomorrow."

He closed the note, "Together, we'll win."
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