Cumulus Media, 107% Yield-to-Maturity, Maturing May 2019
This week we look to the media industry to focus on a radio giant who looks to be turning a corner to increased profitability. Cumulus Media (NASDAQ:CMLS) is the number two radio broadcaster in the United States and has recently posted some encouraging results for the three months ending June 30, 2017. These results include:
A 6.7% year-over-year increase in adjusted EBITDA, the first such increase in over three years
A 1.2% increase in net revenues
Interest coverage of 1.8x.
Cumulus’ 2019 bonds are trading at a deep discount, giving a yield-to-maturity of over 107%. While this yield to maturity is certainly appealing, the company’s balance sheet is not for those averse to risk, and reflects higher risk than most issues reviewed on the Bond-Yields.com site. With that said, the company’s new CEO (since last September) has been doing a fantastic job addressing some of the long-standing struggles at Cumulus and is adamant that Q1 2017 was the inflection point for the company. With the positive results from Q2 it appears that the company has continued to move towards redeeming its performance of the past few years. A high risk bond such as this is not for the novice investor, but lends itself well to a professionally managed portfolio such as our Fixed-Income 2 (FX2) portfolio as well as our top performing hedge fund, Distressed Debt 1.
Turning the Tide
In August, Cumulus Media reported its results for the three months ending June 30, 2017. Mary Berner, Cumulus’ CEO, was pleased with the company’s performance, “We’re reporting second quarter results that provide further evidence that we’ve turned the corner”. Some of these results include the following.
Q2 Adjusted EBITDA was up 6.7% year-over-year, from $63.2 million a year ago to $67.4 million in 2017. This is the first year-over-year adjusted EBITDA increase in over three years.
Net revenues were also up year-over-year, registering a 1.2% increase (from $287.2 million to $290.5 million).
Q2 also marked seven straight quarters of PPM ratings growth. (PPM measures how many people are exposed to or listening to individual radio stations).
After arriving at Cumulus last September, new CEO Mary Berner is intent on turning the radio giant around, who has struggled in the past few years. Given the company’s latest quarterly results, she appears to be on the right track.
In addition to the encouraging results from Q2, Cumulus has a few other positives in its corner:
The company repurchased $28.7 million in face value of its senior secured term loan for $20.0 million in late December 2016. This not only reduced debt levels, but also reduced the company’s ongoing interest expense.
Before Berner arrived as CEO last fall, Cumulus had an extremely high employee turnover rate, somewhere in the high 40’s for non-sales personnel. Since she took over, that has dropped significantly, with employee turnover hovering now around 24%.
Finally, Cumulus is launching neXt2rock, this month. Again, Mary Berner, CEO, talked about the advantages of this move. “By launching neXt2rock under Cumulus Media’s ‘Next’ franchise, we are putting a stake in the ground to support the next generation of musical talent. With the renewed interest in the rock genre among Millennials and Gen Xers, Cumulus has even more opportunities for growth, providing expanded exclusive content and programming for fans, and an even larger audience for America’s newest rock star.” This promotion could prove to be very beneficial for Cumulus as the rock format pulls in the largest audience over Cumulus’ station reach.
About the Issuer
A leader in the radio broadcasting industry, Cumulus Media (NASDAQ:CMLS) combines high-quality local programming with iconic, nationally syndicated media, sports and entertainment brands to deliver premium content choices to the 245 million people reached each week through its 447 owned-and-operated stations broadcasting in 90 US media markets (including eight of the top 10), 8,000 broadcast radio stations affiliated with its Westwood One network and numerous digital channels. Together, the Cumulus/Westwood One platforms make Cumulus Media one of the few media companies that can provide advertisers with national reach and local impact. Cumulus/Westwood One is the exclusive radio broadcast partner to some of the largest brands in sports, entertainment, news, and talk, including the NFL, the NCAA, the Masters, the Olympics, the GRAMMYs, the Academy of Country Music Awards, the American Music Awards, the Billboard Music Awards, Westwood One News, and more. Additionally, it is the nation’s leading provider of country music and lifestyle content through its NASH brand, which serves country fans nationwide through radio programming, exclusive digital content, and live events.
Cumulus’ largest shareholder is private equity firm Crestview Partners, owners of nearly 28% of the company’s outstanding stock.
While Cumulus appears to be turning the tide, it still has some rough water to navigate. First and foremost is the company’s debt level. As of June 30, 2017, the company had $2.4 billion in debt, comprised of term loans and these 2019 notes. Most of this debt came as a result of a quick succession of acquisitions engineered by the company’s last CEO, financed with an increasing level of debt. Cumulus did attempt to refinance some of this debt, namely the 2019 notes last December, but this was ultimately blocked by a U.S judge. Cumulus does appear to have turned a corner this year, but the company will ultimately need to either refinance its debt (earliest maturity is 2019) or restructure it.
Some can remember a time when radio was the only medium for news, communications, and entertainment. While many options have been added in each of these verticals, radio still serves a vast majority of this country’s population. Here are some of the facts about radio today.
Radio is the leading reach platform: 93% of us listen to AM/FM radio over the airwaves, which is higher than TV viewership (89%), PC use (50%), smartphone use (83%), and tablet use (37%).
92% of Millennials are reached weekly by radio and 95% of Generation X.
94% of Baby Boomers are reached each week by radio.
97% of Hispanics and 92% of African Americans are reached each week by radio
Given these amazing statistics, it’s clear that radio will continue to be a valuable mode of communication, entertainment and news.
Interest Coverage and Liquidity
For its latest reported quarter, Cumulus had more than sufficient interest coverage, especially in light of the deep discount at which these 2019 notes are trading. Cumulus posted operating income (without the non-cash depreciation charge) of $63.4 million and interest expense of $34.4 million. This gives Cumulus interest coverage of 1.8x. This is remarkable considering the unbelievably high yield to maturity on these 2019 bonds of over 107%.
The company also has a healthy level of liquidity, posting over $140 million in cash as of June 30, 2017. The company will likely increase this before the end of the year as it anticipates the sale of some of its property in Washington D.C later this year.
The default risk for bondholders is whether Cumulus has truly turned the tide and will be able to not only grow revenues, but repair its balance sheet as well. The company’s Q2 results do provide some encouraging nuggets – first year-over-year increase in adjusted EBITDA in over three years, as well as growth in net revenues. For those investors able to withstand the increased risks associated with these 2019 bonds, the returns could be tremendous.
In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
Summary and Conclusion
Cumulus Media is the second largest radio broadcaster in the country., The company appears to be turning towards increasing revenues and profitability after an extended period of declining revenues. While the yield to maturity on these short 19-month bonds is admittedly fantastic, it does come with significant risk due to the level of debt and the significant recent decrease in the company’s stock. However, for investors who can withstand the risk, the potential returns could provide a portfolio windfall. We feel the risks are acceptable and have marked these bonds for addition to our FX2 managed income portfolio.
Issuer: Cumulus Media Holdings Inc.
Bond Coupon: 7.750%
Yield to Maturity: ~107%
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Disclosure: Durig Capital and certain clients may have positions in Cumulus Media 2019 bonds.
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