Cumulus Media will spend the next roughly six months in U.S. Bankruptcy Court, haggling with its creditors, hoping to erase $1 billion of debt and chart a new course that will, in the words of CEO Mary Berner, remove the “financial chains that we’ve had to contend with over the 18 months of our turnaround.” But how did the company get itself into this position? The answer is spelled out in considerable detail as part of a 122-page disclosure statement filed last week.
From 1998-2013 Cumulus closed on roughly $5 billion in acquisitions to grow its radio empire, with the $2.5 billion purchase of Citadel Broadcasting in 2011 its biggest purchase. “The Company struggled to develop the management and technology infrastructure required to integrate the acquired assets and to support and manage its expanding portfolio,” Cumulus explains. Some of its projections for those acquisitions turned out to be wrong, it says, and management decisions “failed to achieve their desired results.” The cash flow the company was generating couldn’t support the high prices it paid for all those acquisitions, which also included the 2013 purchase of Dial Global (now Westwood One) for $260 million. That drove up the company’s leverage to excessive levels.
Coupled with what it calls “industry pressures,” the company’s ratings, revenue and earnings headed south from 2012-2015. As a result, Cumulus was forced to record total impairment charges of well over $1 billion for 2015 and 2016. In addition to under-performing the industry, Cumulus, like most broadcasters, says it’s been “negatively impacted” by new forms of streaming audio competition. “As a result of these general industry pressures, high acquisition prices and poor performance, Cumulus Media found itself with an excessive level of debt relative to its earnings and rapidly approaching maturities on its funded debt,” the company says in the filing.
Management started to look at ways to restructure its balance sheet in late 2015. But a December 2016 private exchange offer for the company’s 7.75% senior notes failed after a U.S. District Court judge rejected the broadcaster’s bid to move forward with a refinancing plan intended to reduce what was then a $2.4 billion debt load. Some lenders opposed the plan. After terminating the offer and its related refinancing agreement, Cumulus began the negotiations with lenders that would ultimately lead to its Nov. 29 Chapter 11 filing.
Under that restructuring plan, the secured lenders will get an 83.5% equity stake in the company for reducing the $1.729 billion Cumulus owes them in term loans to $1.3 billion. But the unsecured creditors, mostly made up of bondholders, won’t fare as well. The more than $600 million Cumulus owes them will get wiped out in exchange for a 16.5%, equity stake in the company, essentially giving them pennies on the dollar.
More than two-thirds of the company’s lenders have signed the restructuring agreement. But the company needs to get more stakeholders on board with its plan. Cumulus is hoping for voting on the plan to wrap up by Feb. 26 and to get a “confirmation order” on its plan from the court by April 28. It’s shooting for an “effective date” of the restructuring by May 28.
But there may be “significant litigation” along the way, Cumulus warns. Before it cut the restructuring agreement with the term loan holders, Cumulus unsuccessfully tried to work a deal with its senior noteholders. Since filing for Chapter 11, an ad hoc group of those senior noteholders has disputed the restructuring plan. This group, mostly made up of unsecured bondholders, says the restructuring would “overcompensate” the holders of credit agreement claims “to the detriment” of the senior noteholders and all the other unsecured creditors. This litigation “may be protracted and expensive,” Cumulus cautions. “Moreover, if the Bankruptcy Court concludes that the Plan undervalued the Company, the Debtors may be unable to confirm the Plan.”
Meanwhile claims filed against the company have begun to stack up. A total of 22 have been filed in bankruptcy court so far, including hundreds of thousands of dollars owed in taxes. And there are multiple claims by Ford Motor Credit Company. But Cumulus may have a way to quickly settle many of the smaller claims. It’s offering a “convenience claim” that will pay holders of unsecured claims of $20,000 or less 100% of what they’re owed. Other holders of unsecured claims who agree to reduce their claim to $20,000 will also be paid in full.
Ahead on the Cumulus restructuring calendar are a series of hearings before U.S. Bankruptcy Judge Sheeley Chapman in New York. The first is Dec.21, followed by hearings on Feb. 1 and Feb. 28.