Over the past year, we’ve highlighted a number of media names we love, including a good number of traditional radio companies. We made very good calls on these names during the COVID-19 sale and although we took a few profits, this is an area that we believe can see further gains. We’ve spared no effort as we’ve researched nearly every publicly traded player, and while there are a number of stocks that we really like, there are probably just as many that we find perplexing.
We were asked several times about our thoughts on Audacy, Inc. (New York Stock Exchange: AUD) as some see it as leverage on ad sales and/or the Federal Reserve needing to do a relatively quick U-turn on rates. While we agree that the stock could rise sharply if either, and more importantly both, of these elements were to work in Audacy’s favor, we believe further consideration is warranted before rush to buy stocks.
First problem: Stock consolidation
On August 4, 2022, Audacy announced via a press release that the company had been notified by the New York Stock Exchange that the company’s Class A common stock did not comply with the minimum average closing price rule of $1/share over 30 consecutive days. From then on, Audacy can return to compliance in a 6 month “healing period” by having an average closing price of $1/share over a 30 trading day period while also closing at $1/share the last trading day of that month. It’s not a hard rule to follow, especially when a company has important good news to report on. However, the easiest way to restore compliance is for a company’s board to approve a stock split.
Audacy’s management team said it believes the company can get back into compliance, preferably with a stock price rebound on its own. With shares currently trading at just under $0.40/share and the stock recently hit a 14-year low, we’re betting the company will have to do a reverse stock split unless it is finally starting to take the debt burden seriously and fix the legacy activity while slowing down. M&A spending for the podcasting division.
Debt: a problem that management wants to ignore
Currently, Audacy has significant debt. According to our latest count, the company has total debt of $1.86 billion with a weighted average coupon of just over 6.60%. The good news about debt is that there isn’t much to pay off in 2022 or 2023. The bad news is that 2024 is when the company will have to start refinancing maturing debt, and refinancing this debt could be a problem – especially if management wants to build some breathing room from the 2027 and 2029 maturities.
The maturing term loan (it matures on 11/17/2024) should be fairly easy to refinance in a normal market, but if the Federal Reserve continues to raise rates, companies like Audacy might not be viewed favorably from a credit perspective, which in turn could force them to issue bonds at wider spreads for the portion they might not be able to convert into a new loan. We doubt that will become a problem, but regulators could make it a problem if there are cracks in the market with heavily indebted companies.
A reading of the most recent conference call appears to support our thinking on debt maturities in 2024, with management (during Rich Schmaeling’s keynote) discussing their thoughts on all maturities in 2024 (that’s us which we underline):
“Again, assuming any recession we face is not serious and that the recovery begins in the second half of 2023we believe we should be able to refinance our $767 million of outstanding senior debt well before that debt matures in about two years.”
The company is therefore counting on its ability to repay this senior debt and hopes to take care of it before 2024. It would be good news if it could achieve this; however, we wonder what the difference would be and the corresponding increase in interest payments.
While that’s all good, what we found troubling is that Audacy has spent less time, and fewer resources for that matter, tackling its capital structure over the past few years and has lagged behind some industry names. Debt is a problem and in my opinion society is really dropping the ball by not addressing this issue yet. The company’s CBSR 6.5 05/01/27 bonds are currently trading at just over $0.25 on the dollar (and the 2029 maturity is trading at just over $0.24 on the dollar); for those keeping track, that’s a 48.44% return. Rich Schmaeling said that “at this time we are not focused on using cash to redeem our bonds.” If management truly believes it will be able to refinance the company’s senior loans before maturity in 2024, and its business is operating at 30% margins like the rest of the industry, then the management is expected to finally tackle Audacy’s capital structure and start buying back its debt which is trading at distressed levels. Using $25 million in cash, Audacy could redeem approximately $100 million (face value) of its bonds, or nearly 22% of the outstanding bonds of this issue (the bonds maturing in 2027), and save 6 $.5 million per year in interest costs. This would certainly show bond investors that the company takes its leverage seriously, would likely help stabilize bonds, significantly reduce leverage by using less cash to pay off debt at a huge discount, and increase earnings at future due to lower interest costs.
Our final thoughts
We would stay away from that name for the foreseeable future and wait for management to demonstrate that it can either increase earnings, and more importantly free cash flow, or begin to reduce debt significantly. Some of the things laid out in the last conference call gave us hope until we started digging in, like the sale of real estate assets in Houston. Speaking to Investor Relations, we were told that the transaction would not be material, so we have no idea why this was specifically mentioned in the opening remarks of David Field (the Chairman , CEO and controlling family member) during the conference call. Perhaps he was trying to look like he was using a piece of the Cumulus Media (CMLS) playbook, where they sold real estate assets to deleverage their balance sheet.
We suspect a reverse split is coming which will only put another dark cloud over the stock and think the company may need to stop kicking the box when it comes to its debt. If the economy goes into a prolonged recession, Audacy is one of the names ill-prepared for this scenario and would then be faced with tough decisions.
Ultimately, we suspect the company won’t file for bankruptcy because the Fields family doesn’t want to be wiped out. However, we believe it is possible that the company may be forced to sell assets to accelerate its deleveraging…and if it decides to sell terrestrial radio assets, we would assume that it would have to sell valuable assets in order to make the numbers work. We recommend avoiding stocks unless they are using purely speculative capital that they can afford to lose, or have recently purchased stocks and can afford to lose all of those funds.