Valuebuyer, you are deluding yourself. After the past 5 years of decline ETM bond holders have zero faith in the next 7 years.
Remember ETM was buying back their own debt at 60 cents on the dollar? Remember they booked a huge gain thanks to NOT PAYING BACK THE MONEY THEY BORROWED?
Do you really think bondholders are going to be "tripping over themselves" to lend money to ETM when they have seen massive declines in the value of ETM notes?
Do you really think bond holders are not going to demand at least a 5% premium to ride the ETM roller coaster of long term decline? I think it may be much more. Possibly whatever ETM can afford to pay. It will be existing bond holders that are forced to roll the debt into new bonds else they bankrupt ETM. That is the way the game is played when assets are worth less than the liabilities.
Lets assume radio remains productive enough for ETM to pay down your estimated 15 million per quarter for 47 quarters (11.75 years). Then why own the stock? ETM is not not paying a dividend like USMO does as it fades away over the next decade. USMO has no debt.
ETM is a company with more liabilities than market value assets. And I think it always will be. As ETM pays increased interest and some 15 million in debt each year the value of its radio assets will continues to decline. Sat radio picks up ever more of the most valuable premium listeners. Home and office listeners switch to the Internet, IPOD's and smart phones bring MP3's and Internet radio to the auto.
Check out the new $13K Ford Fiesta with Sync. Huge marketing campaign and they always prominently feature Sync (which includes Internet radio capability). This not a Mercedes E class, this is a cheap ford.
ETM is radio, not real estate. There is little hope of long term recovery. ETM will have gradually increased obsolescence from the asset base of radio stations and that will likely outpace their feeble debt reductions thanks in part to much higher interest costs when they re-fi resulting in lower earnings.
I'm not going to argue the point with you any more.
We'll just say that you think ETM debt is viewed as equivalent in risk and liquidity to US government treasuries and so ETM will refinance with a similar low rate to what they have today.
While I think ETM is not not viewed as equivalent to treasury bonds and will have a rate that is 5-6% higher than 10 year tresuries.
Lenders do not want to put ETM into bankruptcy any more than a banker would want to repossess an underwater mortgage because the homeowner took a pay-cut but is still paying his mortgage.
If lenders had taken ETM down at one of those many opportunities to bankrupt them that you point out, the debt holders would take a big hit on their bond valuation and ultimate recovery and net worth. They are not going to do that.
All I am saying is what anyone can see - there will be an appropriate risk premium for the next 7 year of financing which will be 5-6% above 10 year treasuries. That is reasonable and already baked in to ETM's valuation.
I do appraisal work (including both business appraisal and commercial real estate appraisal) for one of the top 25 banks in the country.
Money is cheap. Period. The cost of money rises as the risk rises. As the recent Seeking Alpha article noted, ETM has had good interest coveraqe all along, even during the recession period in 2009.
ROIAK is substanbtially riskier, and warrants higher interest rates, especially now. (A year ago ROIAK looked better, as the compnay had lower expenses).
Banks have lots of cash and not enough loan demand. I am not saying that their interest rate wont rise at ETM, but it will stay down around 5% for the near term future. Any valuation of ETM takes the cost of debt into account. If their debt cost skyrockets, the value of the equity will fall.
Nobody is asking you to buy their debt, and their debt is not available presently except to a selected bank group, as the binds have been repaid and retired.
Ok, now I understand what I'm dealing with. I should not have to point out that 96.5% of mortgages are backed by the US government. Ever heard of Fannie and Freddie?
Money is cheap for the US government, but it is not cheap for radio, or any highly leveraged firm. Take a look at WG which is paying 10% to finance an acquisition even though WG is a high tangible book value, high cash, minimally leveraged, profitable operation. Look at ROIAK. They would be looking great if they had ETM's current financing rates in place.
It is only rational to assume ETM pays 5-6% over 10 year US treasuries. In my debt investing I would require more of an ETM type business but 5-6% premium might be enough for others if the lending/business environment improves a lot over the next 6-9 months.
i agree with your analysis, and just want to add that the bank group's response was not very punitive for a good reason. Had they tried to jack up the interest rate, they would have forced ETM to look for other financing, and good cash flow borrowers like ETM are hard to find. ETM and the bank group have a good relationship, which ETM will remember when it is time to renew, and ETM will be in an even better position as a desirable bank client.
Good job. I had not found the part where it said what the premium was for exceeding the covenant leverage. You copied everything except the section that showed the fixed and capped rates that ETM had swappped into, which was about 2.5% to 4% for about $400 Mil of the debt.
Outpissed does not seem to understand that if interest expense would go up by $40 Mil or so, that earnings would be dramatically afected, as would the stock price. Fortunately outpissed is not running the corp. finance desk at ETM, so our interest should stay around 4% to 5% (worst case), and earnings will remain strong.
If earnings fall to $0.20/ year the stock price will be $2 or less. If earnings are above $1, the stock is headed for double digits. Again, this must be too complex for outpissed to understand, as he says it is priced in. Ridiculous.
Right, 7 times was negotiated early 2010, but it was short term and I think it was the gradual return to 6 times that was raised as a concern possibly requiring another amendment in the future?
So will the unamortized portion of the 5 million cost be expensed when ETM refinances in 2011?
Separate issue, I believe ETM will pay 5-7% more than than the "risk free" 10 year treasury rate. I assume treasuries move up to 4%. I think that is just reasonable.
ETM equity was $30-$50/share when they financed the current deal. Radio consolidation, operating expense reductions, cash generation was all the rage. Back then ETM could have issued equity to take out all their debt. They were considered very low risk debt because they were.
You have to be realistic though, as others pointed out, things have changed a lot. If ETM thought they were going to get cheap financing in 2011 they would be paying us our dividend right now and the freaking crash would not have happened. ETM sent the opposite signal, they were honest. And anyway if ETM had gone into denial they might have become a ROIAK eventually. At least ETM faced the problem. Besides, others in media are paying up so we can't be sitting in denial because the old debt deals were so good and makes ETM recent Q's fairly profitable. ETM debt is not equal to gov debt any more.
Don't get paranoid - it doesn't help the cause.
You loose credibility when you indicate ETM can borrow like the US gov. Those days are far behind the radio industry. Debt risk is priced much better now and radio is unlikely to get a government guarantee, but maybe Obama will help them out?
ETM does have a very good deal for now, but interest is not 2% although that would be awesome. Interest was about 32 million on 700 million or so. Call it 4-5% in 2009.
I think they have to refinance in early 2011 or else the debt will become classified as current and all heck will break loose again in another valuation panic and ETM management will be under pressure and more at the mercy of lenders. There was some talk of the coverage ratio being an issue too. I don't know if that was just default speculation or if ETM will squeak by. I did not try to model that.
If ETM is prudent they will refinance in early 2011 while the pressure is low and I think it will be at 9-11%. Don't worry, that hit of $1 or so to annual earnings is more than priced in.