Canwest steps closer to the brink

Canwest took another step closer to the brink yesterday. At the company’s annual general meeting in Toronto on Wednesday, CEO Leonard Asper announced not only weaker than expected results for the first quarter of its 2009 fiscal year, but even more worrying, that Canwest may be forced to breach a covenant on its debt.

Asper said his company had been blindsided by a sudden drop in advertising revenue resulting in a $33-million loss in the company’s first quarter, compared to a $41-million profit in the same quarter last year. “We have no certainty that we have hit bottom,” he told investors, “I don’t think anyone in this room feels comfortable saying that. It’s hard to say it’s getting worse, but it’s certainly not getting better.”

Following that announcement, Canwest’s stock dropped in value from 80 to 50 cents, and Dominion Bond Rating Service (DBRS) placed its ratings for Canwest Media and Canwest Limited Partnership under review with negative implications. “Unless the company can demonstrate significant and immediate measures to increase its profitability and to reduce its leverage,” DBRS wrote in a release, “the company’s ratings are likely to be lowered at the conclusion of DBRS’s review.” This follows a reduction in the issuer rating for Canwest Media just a month ago, from BB to B (high), meaning that Dominion already considers lending money to Canwest to be a “highly speculative” investment.

Chris Diceman, senior vice-president at Dominion, says that the covenant Canwest is in the most danger of breaching involves secured credit facilities entered into by banks with Canwest Media Inc., the Canwest parent company, which operates one level below the publicly traded holding company. The covenant in question is a condition the banks set out when they loaned money to Canwest, saying that the company would agree to maintain a certain ratio of profits (as measured by EBITDA) to debt. Canwest has already renegotiated some covenants, allowing it to take on more debt, but now it looks like the company may not even be able to comply with the new, easier conditions.

During a conference call with analysts after the shareholders meeting, Asper said that “no stone will be left unturned in terms of meeting our covenants.” In particular, the company is looking at further cost-cutting, and Canwest chief financial officer John Maguire told analysts that there is the “potential” that the company will sell off assets. Some analysts see Canwest’s Australian TV holding, Ten Network, as well as its radio stations in Turkey as potential candidates for the auction block.

Dominion’s Diceman says Canwest’s situation is a tough one to be in, considering the state of the larger economy and the restricted credit markets. “Given that Canwest is a highly-leveraged media company, this is a very serious condition,” he says. “That borrowed money is their form of liquidity, if you will.” Canwest’s options now are to sell assets, trim costs, borrow more money or renegotiate covenants with their lenders, Diceman says. But according to analyst Ben Mogil at Thomas Weisel Partners, Canwest is already using its newspaper limited partnership to borrow more money and flow it up to the parent company to help it meet its obligations, a juggling act that probably can not be sustained for long.

On the positive side, Canwest’s specialty channels and its progression to digital media are doing very well, says Diceman, but neither is supplying the company with much in the way of cash at this point. Diceman adds that if Canwest finds it can not meet its covenants, its next step would be to apply to the banks for a temporary waiver to buy time.

As Maclean’s reported in December, based on Canwest’s 2008 year-end results, Edward Altman, professor of finance at the Stern School of Business at New York University and one of the world’s most respected corporate bankruptcy experts, calculates that Canwest has about a 37 per cent probability of defaulting on its debt within five years.