USA Sunday Soapbox: Junk Bond Radio

For today’s Sunday Soapbox we welcome Mike Lee from the US.

Mike was the co-founder of Brown Bag Productions. He is  a winner of many awards over the years, including the Silver Screen Award, the Billboard Radio Award and seven Telly awards amongst the list.

In his own words, Mike is forever a fan of Aussie radio and the many great people who have worked, and are working in it.

Mike Lee tells it ‘like it is’ – no BS. On the Soapbox he takes a look behind the funding of Clear Channel or as it now called iHeartMedia Inc in the United States.

By Michael R. Lee, Ph.D.

The situation is certainly not unique to radio.  Buy a company at the top of its value and take it private.  When you realize you’ve overpaid (or even if you don’t), saddle it with ridiculous amounts of debt, take as much of your investment out of it as possible, spin off all the valuable components that you can and launch a veritable Ponzi bond scheme while you leave others holding the bag.

At its heart, this is made possible by an economic system that is propelled by short term greed and artificially low interest rates.  Indeed, Clear Channel CFO Richard Bressler, who recently segued from venture capital group Thomas H. Lee, one of the owners of Clear Channel, exulted that borrowing money at 10% interest is essentially astounding and a sign of how respected the company is by investors.

It says quite a bit more about the bond market that pays 2.45% for 10 year Treasury bonds and has jacked up the demand for corporate bonds that pay four times as much.  Bond buyers are so desperate that they are buying the bonds of a company that are rated triple C plus by Standard & Poors.  Moody’s even lower rating of Caa2 is eight levels below investment grade.  Moody’s says this rating is “for companies with very poor financial security” and indicates “elements of  danger with regard to financial capacity.”  It’s hard to find any respect in these scenarios.

Either way, we have a company whose free cash flow in 2014 seems impressive at $1.6 billion until you realize that is slightly less than the interest Clear Channel will pay on its debt this year.  And that absurdly low 10% interest is twice the rate of the bonds they are replacing.

When interest rates return to sane, traditional levels, the bondzi schemers will be paying 15% or more for triple C’s.  And companies that operate by perpetually issuing new bonds to replace the old ones will be buried under red ink and pressure to liquidate every asset possible.

That is the point of this essay.  Clear Channel is not the only radio organization based on this premise.  It is just the biggest and most leveraged.   The problem for those who work in radio is that an industry based on junk bond debt is all about short-term survival.  Long term?  No such thing.  There isn’t even an intermediate term.  The people who now run radio hope to be long gone before insolvency rears its ugly head.

And this affects everything that goes on in daily radio, starting with the attitude and behavior of stations.  It means discounted spot rates because they serve the short terms goals.  It means fewer employees, lower wages, budget contraction, vastly reduced capital expenditures and, quite critically, creative dissipation and lowered morale.

At some point, radio has to admit that it doesn’t matter if every American listens to radio every day.  Flat or declining revenue, unsustainable debt and budgets that have already been slashed to the bone are like pneumonia to a 94 year old.

In all likelihood, this is something you instinctively know.  You’re already playing the short game like your bosses and their bosses.  You would love to be creative, to try unconventional innovation before debt radio pays your salary with a Caa2 junk bond.

Come to think of it, why waste money and tradeout on contest prizes?  If every listener won a micro bond, they would have to listen just to protect their investment.  And if the whole system collapses, they would be in line to get office chairs or the airplane of a certain CEO.

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