Under pressure from its lenders, Indianapolis-based Emmis Communications Corp. says it plans to sell $80 million worth of its radio station assets by July 2018.
Emmis recently renegotiated its debt agreement with JPMorgan Chase Bank and Bank of New York Mellon, the company said Monday in a public filing. Under terms of that agreement, Emmis must sell at least $80 million worth of assets and use those proceeds to pay down its debt.
Ryan Hornaday, Emmis’ chief financial officer, told IBJ the asset sales will come from the company’s radio station holdings. Hornaday declined to say which stations might be sold, or whether the company has any potential buyers.
“We’re confident that we can achieve the $80 million [divestiture] without selling a substantial portion of the portfolio,” he said. “We do still have some very desirable assets.”
Emmis owns 16 FM and three AM radio stations in New York; Los Angeles; St. Louis; Austin, Texas; and Indianapolis. The company also developed and licenses the cloud-based broadcasting software platform TagStation and is the developer of the smartphone app NextRadio. Emmis also owns Indianapolis Monthly magazine.
Earlier this year, Emmis completed the sale of four Terre Haute-area radio stations for a total of $5.2 million. The company’s remaining stations are all in markets much larger than Terre Haute, Hornaday said, so they would command higher prices.
Under the terms of the lending agreement, Emmis must enter into the asset sales agreements by Jan. 18, and the sales must close by July 18, 2018.
Industry expert Tom Taylor, who produces a daily online newsletter on the radio business, speculated Emmis might look to sell its Los Angeles station, KPWR-FM.
“To get to $80 million, I think they have to look at Los Angeles,” Taylor said.
KPWR is Emmis’ only station in the Los Angeles market, he said, plus it’s under “pretty relentless attack” from a competitor who changed its format to compete directly with the Emmis station.
KPWR would be an attractive purchase for a buyer who might want to change its format, he said.
Taylor couldn’t say, though, whether KPWR on its own would sell for $80 million or whether Emmis would have to also divest other assets.
The larger goal for Emmis is to reduce its total debt and its debt leverage.
The asset sales will go toward reducing Emmis’ $152.2 million in credit facility debt, Hornaday told IBJ. Emmis also has $68.8 million in nonrecourse debt, for total indebtedness of $221 million as of Feb. 28.
As of Nov. 30, 2016, the company’s debt leverage—its ratio of debt to earnings—stood at 5.53 times earnings before interest, taxes, depreciation and amortization, or EBITDA.
Emmis and its lenders renegotiated their lending agreement now, Hornaday said, because, under the terms of the previous agreement, Emmis would have had to get its debt leverage to no more than four times earnings by the end of May.
Both parties saw that Emmis was unlikely to meet this goal, Hornaday said, so they started renegotiating terms several months ago.
“If we did nothing and we just sat on our hands, we would have had a default, and no one wanted that,” he said.
Under the new terms, Emmis has until the quarter ending Aug. 31, 2018, to get its debt leverage ratio to four times earnings. In the meantime, its new requirement is that it must generate 12-month EBITDA of at least $20 million.
To sweeten the deal, Emmis also agreed to pay its lenders a $1.5 million fee and an extra percentage point in interest on its borrowings. The rate will rise from 7 percent to 8 percent, Hornaday said, which represents an extra $1.5 million in annual interest costs.
Mark Foster, a financial analyst at Kirr Marbach & Co. in Columbus, Indiana, said the new terms should give Emmis “a little breathing room” while it works to reduce its debt loads.
“I think Emmis has some pretty good properties, and my guess is they are saleable,” Foster told IBJ.
Emmis’ 12-month EBITDA currently hovers around the $30 million mark, he said, so, even after it sells some assets, the company should be able to comply with the $20 million EBITDA requirement.
Emmis’ struggles are not unique, Foster said. Over the years, radio companies have consolidated, taking on big piles of debt to buy new stations.
The problem, he said, is that many of those stations were overvalued and are no longer generating the earnings they once did. Listeners now have an array of digital options, including satellite radio and music streaming, which creates new competition for listeners and ad revenue.
Earlier this week, iHeart Radio, the biggest operator of radio stations in the United States, warned in its quarterly report that it might not survive another year because of massive debt. The operator of more than 850 stations, including four in Indianapolis, has a debt load of $20 billion. It has $350 million in debt coming due this year and another $8.3 billion due in 2019.
In its most recent annual report, released last May, Emmis took note of declining radio revenue.
The report noted that, over the past few years, radio revenue in Emmis’ markets has not kept up with national GDP growth. The company’s market revenue was down 1.5 percent for the fiscal year ending in February 2016, and down 3.7 percent in February 2015. This compares to overall U.S. GDP annual growth of 3 percent to 4 percent during those two years.
These realities will continue to challenge the radio industry in the foreseeable future, Foster said. “There’s just a lot more alternatives today than there were in the past, and those aren’t going away.”