We at Distressed Debt 1 LP, and Durig Fixed Income 2, would like to present an explanation of the underlying issue with Cumulus Media (CMLS) current restructuring proposal, as we see it.
First let’s get an understanding of its valuation.
Last quarter’s EBITDA for Cumulus Media was reported at $61.8 million. Radio media companies historically trade above ten times EBITDA, especially for those growing profits. Since the new management has been involved, the company’s bottom line is growing. So, we will use a simple 10x’s multiple. As the run rate of last quarter’s EBITDA was $61.8 million, multiplying times 4 quarters, times ten, gives an enterprise valuation estimate of around $2,472 million.
There are two debt issues outstanding, the first being $1,728 million in notes, and the other being $610 million in the 2019 bonds, for a total debt of $2,338 million. With $ 2,472 million in equity valuation, there should be enough to cover the debt. According to this simple calculation there, should even be additional value.
So what is going so on here?
The first position term loan we will call Bank Term Debt, and the 2019 Bonds we will call Bonds.
Next, let’s look at how they structured the proposed deal:
|Bank Term Debt||Bonds|
|Make whole on primary debt||75.23 %||0|
|Improve position after restructuring. Still in first position||Yes. Not only do they stay number one, but the Company debt service is much less, making the chance that this happens again less likely.||No – In any restructuring the Bond holders move to 100% stock and stock is always subordinate to any outstanding debt.|
|Payments are current||Yes||No – Missed an interest payments of $23 million|
|Defaulted||Technically, Yes – but not the result of a Financial or Income loss||Yes – Financially pressured to miss interest payment beyond 30 day grace period..|
|Buying Back Bonds||Yes – Bought back about $81 million at par.||No – Cumulus offered to buy back bonds at 50 cents on the dollar, but the bank killed the deal|
The Bank Term Debt is first in line, and will be the only one in line with a pro rata replacement bond. The term debt appears to decrease about $428 million in principle in this deal, and represents a decrease of less than 25% of present full value. Now, here is the other, nearly unbelievable, side of this restructuring.
After considering that the restructured enterprise value estimate would remain at $2,472 million, subtracting the $1,300 million in new debt still owed to the banks leaves an estimated equity market valuation of about $1,172 million. This is roughly how they proposed the new stock should be issued (aside from a small percentage to incentivize current management.)
|New Stock||Bank Term Debt||Bonds|
|Proposed Stock split||83.5 %||16.5%|
|Total stock valuation estimate||$978.62 million, spread over the $1,728 million bond debt||$193.38 million, spread over the $610 million bond debt|
|Dollar amount of estimated new stock equity, Per Bond||$ 566.33||$ 317.01|
Adding bonds and estimated valuation for new stock equity:
|Value of a single bond||Bank Term Debt||Bonds|
|New Bond Value||75.23 percent of old bond par value||No replacement bond, so nothing (zero) value.|
|New Stock Value||56.33 percent of old bond’s par value||31.7 percent of old bond’s par value|
|Total value of the “deal” after Restructuring||131.86% of old bond’s par value !!!||31.70% of old bond’s par value|
This is stunning, as evidently the banks want to increase their valuation by nearly 32% while decreasing the 2019 bond valuation by over 68%. This is truly astounding, and it’s no wonder or mystery why over 96% of the banks involved support this restructuring. The company and it’s new management have done a good job of increasing value. The real problem here seems to be with the banks, which are first in line when a restructuring is needed. Traditionally, once they are positioned to be made whole, the next in line get their cut. But this bank syndicate appears to be overly greedy, trying to maximize their profit by hurting the next in line stakeholder, which we think is ethically, morally, and financially wrong.
According to their November 2nd SEC filing, the previously proposed restructuring asked the 2019 bondholders to invest $350 million dollars, the proceeds of which would be used to pay down the Bank Term Loan, with bondholders taking 100% (less 3% to management incentives) of the new stock. That would be close to a traditional restructuring, but this early proposal failed because the Banks demanded that the bondholders put up the $350 million in new funding. The banks did not open it up to allow anyone to invest the $350 million to help fund the company, whereby they could be assured of being made whole. The company does not actually need additional working capital, they were merely facing a term loan debt wall.
What this last proposal indicates is that in lieu of a $350 million paydown of the Bank Term Loan, the banks would get the lion’s share (83.5%) of the new stock deal, reduce the total Term Loan debt to $1,300 million, and slightly lower the interest rate of it (which would also benefit stockholders.) What this equates to, more or less, is the banks taking what we perceive to be about $978 million worth of new stock in exchange for a debt reduction of about $428 million. In addition to that, given the same stock valuation, they want to force the 2019 bondholders to accept a mere $193 million worth of new equity in exchange for $610 million of debt. In other words, they remain whole on the outstanding debt and take new stock at more than double the full value of the portion of debt that is forgiven. At the same time, they expect the 2019 bondholders to forgive 100% of the debt and accept stock worth less than one-third of the debt’s par value. Thus, the banks appear to be going out of their way to hurt fellow stakeholders with their greediness, and are trying to bag 131.86% of the spoils. That’s a full 31% more than we think they ethically deserve.
We believe the following equity split would be far more reasonable (and certainly more acceptable), and sufficiently discounted to assure Banks that the Term Loan would be more than adequately satisfied:
|New Stock||Bank Term Debt||Bonds|
|Proposed Stock split||55 %||45 %|
|Total Stock dollars||$644.60 million of equity exchanged for $428 million debt forgiven.||$527.40 million of equity exchanged for $610 million of debt forgiven|
|Equity Value exchanged per $1000 of debt (forgiven)||$ 1,506.07||$ 864.59|
If the equity split was 55% for the Bank Term Debt and 45% for the 2019 bondholders, the Bank Term Debt would receive a 74% premium over what the 2019 bondholders would receive for their share of equity in the new company. Averaging this debt for equity exchange premium into the current Bank Term Debt would value it at 112.53% of par, for a 12.5% gain in principle, while the 2019 Bondholders exchange for equity would equate to accepting 86% of par value, for a 14% loss in principle. However, even a 50-50 split in new stock would still indicate a 109% valuation for the Bank Term Loan and only a 96% of par valuation for 2019 bondholders.
Cumulus Media has worked diligently to reduce the debt, yet at every step the banks seem to have made the situation untenable. The banks appear to have used their power of being first in line to manipulate and take financial advantage over Cumulus Media, and all other stakeholders. This was evidenced when the company tried to reduce its debt, first in a lawsuit, and now through its chapter 11 bankruptcy negotiations. Consequently, we at Distressed Debt 1 LP and Durig Fixed Income 2 are opposed to this recent proposal, and would urge other 2019 bondholder to oppose it. We will be possibly be updating this situation at Bond-Yields.com, in our newsletter, or at Distressed Debt1.com as it changes, as we believe providing increased and fair value in Cumulus Media Bonds is worth fighting for. To be assured of our updates please sign up.
In my 30 years of professional investing, I have very rarely seen the use of such power to bully other debtors into such a lopsided restructuring deal. It’s more than obvious why it has gained a 96% acceptance rate with the banks, and (as far as we know) almost none with the 2019 bondholders! However, we also want to make it known that if these (very greedy, in our opinion) bankers are so quick and eager to accept 83.5% of the new stock in exchange for $428 of debt, there should be absolutely no doubt in anyone’s mind that the 16.5% of the new stock is worth significantly more than the mere $85 million (or about 14% of par) that it would equate to for 2019 bondholders.
We invite 2019 bondholders looking for more information concerning our current assessment of Cumulus Media’s restructuring proposal, or any future changes of it, to contact us at 971-732-5119