Central European Media needs to raise cash, says all options are on table

By Paul Deckelman

New York, Oct. 30 - Central European Media Enterprises Ltd., which was able to cut its debt levels earlier in the year, said Wednesday that its still sizable debt-service costs and capital spending requirements, combined with lagging financial performance, have put it into a hole. The company will need to raise capital and said it is exploring various options for doing so.

During the conference call following the release of its results for the 2013 third quarter ended Sept. 30, co-chief executive officer Michael Del Nin said that the company, which ended the quarter with just under $123 million of cash and cash equivalents, expects to end the year with less than half that, some $60 million.

"Given the expected cash burn this year and the amount of cash with which we expect to end the year, the company will need additional capital," he cautioned.

"We are currently reviewing all of our alternatives, including public or private debt and equity financing, asset sales and the negotiation of payment obligations with a number of our major suppliers," among them being outside companies that provide the Hamilton, Bermuda-based broadcasting company with programming for its various television channels, Del Nin said.

He also said that the company was in discussions with its main stockholder - U.S.-based cable operator Time Warner Inc., which owns 49.8% of the company - "regarding a possible capital transaction, including debt, to address our liquidity position."

He noted that those discussions were preliminary, with no assurances regarding their ultimate outcome and said that CME would not be able to discuss them further at this time.

He reiterated that latter point several times during the question-and-answer portion of the conference call with analysts following his formal presentation and those of Christoph Mainusch, with whom he shares CEO duties, and the company's recently appointed acting chief financial officer and principal accounting officer, David Sturgeon.

Among other things, Del Nin declined to speculate on the ultimate amount of capital that the company hopes to raise, and he declined to state whether it might to look to parties other than Time Warner to raise funds.

Del Nin did not say so in as many words during the conference call, but the company's latest 10-Q filing with the Securities and Exchange Commission, covering its performance for the third quarter and for the first nine months of fiscal 2013, while including a similar cautionary note, added the warning: "If we are unable to secure additional financing, we will be unable to meet our debt service obligations and generally fund our operations sometime within the next 12 months."

A lower debt load

According to a slide presentation prepared for use on the conference call webcast, the company's level of senior debt as of Sept. 30 stood at $954 million equivalent, consisting of $261 million of 5% senior convertible notes due 2015, $369 million-equivalent of euro-denominated 11 5/8% senior unsecured notes due 2016 and $324 million-equivalent of euro-denominated 9% senior secured notes due 2017. The two euronote issues had been sold via the company's CET 21 spol sro financing subsidiary.

The debt level was down from the more than $1.2 billion that was on the balance sheet at the end of fiscal 2012 on Dec. 31. In the interim, the company repaid and extinguished the last $20.5 million of 3.5% senior convertible notes due 2013 that remained outstanding from the $475 million it sold in 2008 at their maturity on March 15.

The company also reduced the balance on the 2016 notes in June, when it repurchased €205.6 million (about $270 million at the transaction date) of those notes for cash consideration of €228.4 million (about $300 million), including accrued interest of €6.8 million (about $9 million).

The company partially funded the latter note repurchase with the proceeds from private and public equity offerings, including a common stock sale in May that raised about $152 million.

During the Q&A segment, an analyst retroactively questioned the decision to repurchase the 11 5/8% notes earlier in the yea, in view of the current sever liquidity crunch that Del Nin and the other executives are now warning about, wondering whether financial conditions had deteriorated so much in the space of just a few months and whether the company had the support of its major shareholders "when you made the decision to put the company at risk" with the purchase.

Del Min, who in fact was not in charge of the company at the time, replied, "The decision that was made to repurchase some of that debt was obviously done at a time when the expectations for performance were different than what they are today, and that's what drove that decision."

He added that "obviously those [anticipated] performance levels have not played out."

Del Min and Mainusch did not take command as co-CEOs until mid-September, following the August resignation of then-CEO and president Adrian Sarbu.

Another analyst, noting that Del Min had said that the company might consider a debt transaction as a possible means of raising capital, stated that in view of the fact that the company had been focused on cutting debt earlier, with the extinguishment of the 2013 converts and the repurchase of a big slug of the 2016 notes, "it wouldn't make much sense to me."

The CEO declined to elaborate on his earlier statement, other than repeating, "We are in the process of evaluating every possible opportunity to get additional capital and not limiting it to any one avenue."

Capital structure constraints

When asked whether there were any constraints in the current capital structure on how much capital the company might be able to raise and how it might raise that money, Del Min acknowledged that there are such constraints and referred the questioner to the 10-Q.

That filing, in turn, includes the provision that under the terms of the indentures governing the CET 21 2016 and 2017 notes, the company is "largely restricted from raising debt at the corporate level or making certain payments or investments" if the coverage ratio of consolidated EBITDA to consolidated interest expense is less than 2.0 times."

Additionally, CET 21 and its subsidiaries are restricted from incurring debt if the ratio of consolidated debt to consolidated EBITDA of CET 21 and its restricted subsidiaries, would exceed 2.25 times.

CFO Sturgeon noted in his presentation that overall revenues were down by 3% year over year, to $136 million, with the slide led by a 26% drop in revenues in the Czech Republic and a 29% fall in neighboring Slovakia, due to declines in advertising revenues.

The company's costs also went up, in part due to efforts it has been taking to restructure its operations in order to cut costs, requiring the elimination of many positions and the payment of severance. The company expects to have cut total staff by 1,000 positions by the end of the year, although the increased severance costs will weigh on the financials going forward, causing it to lower its full-year guidance.

The company provides programming in Eastern European countries, including the Czech Republic, Bulgaria, Romania, Slovakia, Slovenia and Croatia.

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