On March 12, as the coronavirus spread from Europe and Asia to the United States, Live Nation, joined by AEG and major agencies, took the unprecedented step to recommend that tours be postponed, setting in motion a chain of events that has reshaped the global music business. Just one week later, credit ratings agency Moody’s downgraded Live Nation’s debt on expectations a downturn in touring would “materially weaken” the company’s 2020 financial results. Live Nation moved quickly, announcing a $500 million cost-reduction plan – including furloughs, layoffs and executive pay cuts — as well as better debt terms on April 13.
It was a remarkable 32-day span — and there would be more to come.
In business, unencumbered cash is always king. But in a pandemic, debt and credit are the next best things. Faced with a once-in-a-lifetime economic nosedive, many music companies are turning to debt and credit to sustain themselves through the coronavirus crisis. Some companies need every dollar to survive until the concert or advertising businesses return to normal. Others want an insurance policy against disturbances in their cash flows. In either case, few businesses will get through 2020 and 2021 unscathed.
1. Music companies raised $3.3 billion in liquidity since March to help weather the COVID-19 pandemic.
2. Some companies could face defaulted on long-term debt if debt holders hadn’t eased terms to account for shocks–some severe–to revenue and earnings.
3. Large companies have it relatively easy. Small companies, such as independent music venues, can’t access capital markets and have sought help from Congress.
4. The biggest companies that employ tens of thousands of people have enough liquidity to get through 2020, but time will tell if they’ve become over-leveraged.
Since mid-March, nine companies that work in music — Live Nation, iHeartMedia, Warner Music Group, CAA, WME, Ryman Hospitality, Cumulus, Entercom and Stingray — have condensed years of financial deals into three frenzied months that collectively added $3.3 billion in liquidity: $1.8 billion from notes sales, $630 million from new loans, $197 million drawn from existing credit lines, $670 million of new credit and $11 million from an asset sale. In addition, two companies saved cash by nixing planned acquisitions: Live Nation canceled its $480 million acquisition of Mexican promoter OCESA — the companies are currently in arbitration — and Ryman Properties backed out of a $283 million purchase of a mixed-use development with a 2,500-seat venue in Austin.
Companies around the world face a cash crunch after governments issued stay-in-place orders in March, businesses were forced to close and unemployment spiked (from 4.4% to 14.7% in April). In order to inject capital into the U.S. economy, the Federal Reserve allotted $250 billion to buy already-issued corporate debt — investment grade debt from companies such as Apple, AT&T and Volkswagen Group America — and $500 billion to buy new debt directly from firms. Other companies were saved by lines of credit from banks, from $500 million for AMC Theaters (which plans to roll out theater openings on July 30) to $25 billion for Boeing. And many smaller businesses received loans through the CARES Act and won’t need to pay back all of the principal.
In normal times, healthy companies routinely use debt to fund operations or make acquisitions, using the interest expense to lower their taxes. Compared to stocks, easily traded and discussed 24/7 on business television channels, debt is a mysterious financial instrument. Companies’ announcements of notes sales and new credit facilities aren’t as attention-grabbing as stock market IPOs. But debt and credit will be vital for getting companies — especially ones tied to advertising and live music — through the rocky road ahead.
The downside of borrowing, especially during a pandemic, is the risk a company will extend itself too far, says Helen Murphy, CEO of Anthem Entertainment Group. “If you take on more debt, what’s your ability to service that debt?” Higher interest payments leave a company with less cash to operate and make routine capital expenditures. Twice in the last decade a music company failed under the debt from a leveraged buy-out: EMI Music in 2010 and iHeartMedia in 2018. The coronavirus pandemic could create similar pressures if a company takes on debt, doesn’t hit its revenue target and is drained by larger interest payments.
With Touring Hit Hard, It’s a Long-Term Play to Stay Afloat:
In March, the live music business was hopeful the pandemic would be a brief hiccup in an otherwise successful year. (Live Nation CEO Michael Rapino downplayed the coronavirus as a regional threat in a February earnings call.) By April, the summer concert season was being read its last rites. S&P Global Ratings followed Moody’s with a downgrade of Live Nation on May 13. S&P also downgraded HeartMedia on April 1 and Endeavor, owner of power agency William Morris Endeavor, on April 13 for its $4 billion-plus debt to Silver Lake Partners and other private equity firms. Fortunately for Live Nation, most of its $5 billion of debt is due after 2025; $550 million of notes come due in 2023 and another $575 million in 2024. But for both companies, lower credit ratings will mean debt will become costlier in the future.
That Live Nation has added $1.32 billion in liquidity since March speaks to the concert promoter’s precarious position. Every major tour has been suspended until 2020 and festivals initially pushed to fall are now postponed to 2021. After Live Nation suspended tours on March 12, its first-quarter concert revenues fell 24.6% to $993.4 million in the period, while ticketing revenue sank 15.8% to $284.3 million. With no live shows other than experimental driven-in theater events and ticketing fees for advance sales not expected until at least the third and fourth quarters, Live Nation’s second quarter revenue will be negligible.
To survive through a virtually empty concert schedule in the second and third quarters, Live Nation sold notes and gained credit capacity for an “extra cushion to withstand any scenario well into 2021,” Rapino said a May 20 press release. With a monthly operational cash burn of $150 million plus $15 million in monthly interest expense — not including capital expenditures, which Live Nation is reassessing — the new notes will cover about a year and at zero revenue, although the company expects to get ticketing fees in late 2020 for 2021 concerts. It should be enough. “We don’t see a strong likelihood of a cash crunch for Live Nation in 2020,” said Stephen Glagola, an analyst at Cowan & Co.
Liquidity Means Security:
After the advertising market receded in March, and without a full recovery in sight, radio companies raced to add liquidity. iHeartMedia, Cumulus and Entercom drew down their credit facilities by $120 million, $60 million and $113 million, respectively; and iHeartRadio and Cumulus added $120 million and $100 million in credit, respectively. Stingray, a Canadian company with numerous brands in cable and online radio, secured a loan for $20 million and drew $10 million from its credit facility.
With the booming subscription business, record labels and publishers have less exposure to COVID-19 than the concert business. But some segments will be affected: brick-and-mortar retailers were forced to close, affecting physical sales, and the synch market could falter if brands pulled back ad spending. On May 7, Warner Music Group added $120 million to a $180 million credit facility while also pushing back its maturity date, lowering the interest margin and improving the covenants. They were just-in-case measures, said executive vp and CFO Eric Levein during a May 21 earnings call. “While we haven’t needed to draw on the revolver in the past five years, it’s helpful to us to know it’s there if necessary.” On June 16, Warner announced the placement of $535 million in new notes, due in 2030, of which $300 million will pay off notes due in 2023.
The additional credit could come in handy: Last month, Warner revealed its total revenues were down 12% in April compared to the prior-year period but “won’t really know the impact of COVID” until the second quarter ends, CEO Steve Cooper noted in the May 7 earnings call. During its IPO roadshow in May, Warner executives told prospective investors they expected EBITDA (earnings before interest, taxes, depreciation and amortization) in excess of $1 billion in 2021 rather than provide guidance for 2020, a source recently told Billboard. Even so, investors weren’t phased. On June 2, Warner owner Access Industries sold $1.93 billion of stock in the largest U.S. IPO of the year to date.
With total liquidity of $784 million, including $484 million in cash and cash equivalents, Warner won’t run into trouble unless subscription services such as Spotify — collectively 64% of Warner’s total revenues — suffer a subscriber exodus during a prolonged recession. (In theory, Spotify’s fee-based, recurring revenue will provide more stability than CDs, LPs and downloads and its strong first quarter earnings suggests consumers will keep their subscriptions.) And unlike SiriusXM — which, like many companies, rescinded its 2020 guidance — Spotify has not changed its forecast for second-quarter subscriber growth.
Cost-Cutting Is Key, But Not Enough on Its Own:
Since mid-March, promoters (Live Nation, AEG), agencies (CAA, UTA, WME) and radio companies (iHeartMedia, Cumulus) have used combinations of layoffs, furloughs, salary reductions and spending cuts to reduce their monthly cash burn. Lenders want a borrower “to be able to show them a budget [so] they can survive for a period of time, the duration of this crisis,” says Carol Ann Huff, a partner at Arnold & Porter who specializes in capital markets transactions.
But cost-cutting isn’t enough. The pandemic is such a unique environment that creditors must ease debt covenants — guardrails to help prevent default and ensure repayment — to prevent borrowers from defaulting on their debt and keep businesses from financial ruin. “There definitely is a trend toward companies seeking waivers” of debt covenants to buy time while the economy improves,” Huff says. “Lenders are willing to work with companies to a certain extent. As long as a borrower can reduce costs and show an ability to remain liquid, it’s often better for a lender to give those companies some runway.”
A common covenant is a debt-to-EBITDA ratio around 4.5, meaning the borrower is limited to $4.50 of debt for each $1 of EBITDA. The problem is that the normal math doesn’t work in an abnormal 2020. With live music on hiatus and the advertising market constricted, some companies need more debt (a larger numerator) and will suffer from lower — or negative — EBITDA (a smaller denominator), resulting in a ratio that’s multiples greater than 4.5. For example, Warner’s lenders eased the debt-to-EBITDA ratio from 4.75-to-1 to 5-to-1 (and extended the due date of its credit facility from January 2023 to April 2025).
With the live music business all but frozen, Live Nation’s lenders will allow EBITDA from 2019 to be used in debt-to-EBITDA calculations from the fourth quarter of 2020 through the second quarter of 2021. The revised numbers will turn the math in Live Nation’s favor; Huber Research analyst Doug Arthur forecasts 2020 EBITDA loss of $426 million on revenues of just $3 billion; last year Live Nation posted $942.5 million of EBITDA and $11.5 billion of revenue. Goldman Sachs has forecast a 75% decline in the global live music business this year. A Live Nation spokesperson says the company “expect[s] to be in compliance with our debt covenants … for all of 2020.”
Radio companies need favorable terms, on top of cost-cutting measures, to help stay out of default. Radio advertising began to fall in March and S&P Global Ratings estimates radio advertising will decline 16.5% overall this year before rebounding in 2021 — but only to 90% of 2019 levels. Even before the pandemic, iHeartMedia had no maintenance covenants for its term loan or senior secured notes. On April 30, radio company Entercom amended a debt covenant so that nearly a quarter of its debt is removed from the debt-to-EBITDA ratio.
Not as endangered as broadcast radio companies, SiriusXM nonetheless expects COVID-19 to hurt the automobile market and Pandora’s advertising revenue, the company said in its April 20 earnings release. At the same time, SiriusXM didn’t expect COVID-19 to harm its liquidity; it had $1.75 billion available in a revolver credit facility as of March 30. Even so, the company sold $1.5 billion of new notes due in 2030 — at a lower interest rate — to pay off notes of the same amount of notes with due dates of 2023 and 2025. In a pandemic, a later due date beats an earlier due date.
Deal-Making Can’t Stop, Won’t Stop:
Not all companies are pausing acquisitions amid the pandemic — although putting a price on a catalog becomes trickier. On April 2, Hipgnosis Songs, an active investor in music publishing rights, revised its revolving credit facility to add £50 million ($62.5 million at current conversion rates) to its £100 million ($125 million) facility with the option to seek another £50 million for new purchases. Hipgnosis’ catalog was valued at £747 million ($933 million) as of March 31 and includes classic songs such as Bon Jovi’s “Livin’ On A Prayer” and Journey’s “Don’t Stop Believin’,” as well as works by modern hit-makers like Benny Blanco, Jack Antonoff and The Chainsmokers.
Its debt has two covenants: total debt cannot exceed 20% of net present value — 30% if shareholders approve the board’s proposal — and the company must maintain liquidity greater than an estimate of one year’s total costs. No problem, says Hipgnosis founder Merck Mercuriadis. “We always have an eight figure liquidity buffer,” he says. “You’re talking over £50 million at any one time…. You can’t provide for a pandemic, but we’ve provided that our assets and investors are protected at all times.” Not content with its 54 songwriter catalogs since its IPO in July 2018, Hipgnosis plans to offer Class C shares to raise £200 million ($250 million) “to fund further acquisitions,” according to a July 3 announcement.
Likewise, Murphy says Anthem won’t slow its deal-making during the pandemic, although uncertainty surrounding the pandemic has made asset owners reassess if they’re willing to buy or sell. “I think it’s very difficult to see what impact the pandemic is having on prices of anything at the moment,” she says. Without clarity about future revenue streams — royalties can take nine months to flow from a foreign country, through a U.S. performing rights organization and finally to a publisher — a potential buyer can’t put a proper price on a catalog, she notes. “A lot of it depends on the duration of the cycle.”
When It Comes to Raising Cash, Bigger Is Better:
In a sense, companies that can access capital markets for debt and credit are big enough not to fail, to tweak a term (“too big to fail”) used for investment banks during the 2008 housing crisis. A company that’s too big to fail receives a government bailout to prevent chaos in the economy. In 2020, a company that’s big enough not to fail will find lenders willing to help guard against insolvency or bankruptcy.
“Broadly speaking we believe that large companies, especially those publicly traded, are going to have a huge leg up in securing liquidity,” says Stephen Korn, chief investment officer at Fielder Capital. Across the U.S., “smaller companies will have higher barriers in part due to Washington’s inability to get the funds there.”
Small music companies like record labels have access to the CARES Act’s Payroll Protection Plan that launched on April 3. But music venues are making a last-ditch effort in Washington to get PPP loan terms that fit their specific situation: rent. Loan forgiveness requires 75% of money goes to payroll (many venues laid off most or all of their staffs and who’s left isn’t working), doesn’t account for high overhead costs (leases are a major expense for venues) and required staff to be re-hired by June 30 (venues don’t know they they will open).
Unlike large corporations that borrow purely as legal entities, small businesses loans are often secured with owners’ personal guarantees.
“Literally the only place we can go is Congress and the federal government,” says Dayna Frank, CEO of First Avenue & 7th St. Entry in Minneapolis and president of the National Independent Venue Association. Because small businesses tend to have personal guarantees for loans, venue owners’ personal assets are on the line, she explains. “People are faced with losing their homes. Big companies aren’t concerned if their kids get to sleep in their bedrooms.”