Cumulus Media's Clouded Debt Picture Has no Silver Lining

 | Feb 26, 2016 | 10:45 AM EST  | Comments
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More dark clouds may be on the horizon for Cumulus Media (CMLS).

After all, shares of the nation's second-largest terrestrial-radio operator don't have much more time to float below $1 before Nasdaq will cut the troubled ticker from its equity listings.

And the company's debt picture is not much prettier. Investors will be closely eyeing the Atlanta media company's quarterly earnings call, slated for March 10, to see if CEO Mary Berner, who replaced founder Lewis Dickey last fall, has managed to find ways to shore up cash in order to stage a much needed turnaround.

Cumulus touts about $2.5 billion in total debt through a combination of $1.9 billion worth of leveraged loans and $600 million in high-yield bonds, both rated several notches below investment grade by both Moody's and Standard and Poor's.

Its loan component will mature in 2020 -- one year after its senior unsecured bonds are coming due -- and are currently trading around $0.66 on the dollar in secondary markets. These loans are rated six notches below investment grade by Standard & Poor's, yet still considered a safer investment than their high-yield counterpart because they sit higher in the firm's capital structure, meaning they're more likely to be paid back in the event of a bankruptcy or restructuring.

And this paper -- which pays out an annual floating rate of about 4.25% vs. 7.75% on its bonds -- is trading down more than 30% from just five months ago, before management received word from Nasdaq that they have 180 days to get their stock price up above $1. Cumulus shares are down roughly 75% over the period, trading at $0.28 Friday morning.

Cumulus' chief concern is its 9.5x leverage, based on $2.5 billion of debt and trailing 12-month earnings before interest, taxes, depreciation and amortization (EBITDA) of $261 million, based on Bloomberg financial data. That's up from 8x in 2014, and especially dismaying to lenders as none of its debt has maintenance covenants requiring Cumulus to keep its leverage in check below a certain multiple. The absence of such lender protections makes the paper "covenant lite," an industry term for the borrower-friendly asset class.

In terms of liquidity, the company has about $84 million in cash and roughly $250 million available on its revolving credit facility and asset-backed credit line, based on its third-quarter filing with the Securities and Exchange Commission. But even though its bond maturities are three years off, the company will need to shell out about $140 million in annual interest payments on its high-yielding debt stack.

A meaningful turnaround will hinge on a more prudent cost-cutting plan, Berner said on a Cumulus' quarterly earnings call with analysts in November, as previous efforts to trim down spending have disproportionately weighed on sales.

"And finally, we've been asked, will the turnaround require significant new investments? And the answer here is no," Berner said. "While certain areas may require and deserve additional investment, I expect to execute all changes in a cost neutral way at worst. This company has lost more than a dollar of revenue for every dollar of expense reduction over the past four years. So I'm focused on intelligently managing the cost structure."

The company will also need a cultural overhaul to get back on track, according to Berner, as much of its workforce has walked out over the past two years amid growing business concerns, Berner added. 

"Cumulus experienced 48% turnover over the past 18 months, the vast majority of which was voluntary," she said. "That's over 2,000 people walking out the door. The hard cost of this turnover as well as the negative impact it has imposed on the company in terms of lost opportunity, recruitment, training, lost productivity and reputational issues are conservatively estimated in the millions of dollars annually."

Cumulus is the nation's second-largest terrestrial radio operator by sales, following IHeartMedia (IHRT), whose shares have fallen 78% over the past 12 months vs. a 93% decline at Cumulus. 

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