Granite Broadcasting eyes asset sales to improve liquidity, but nothing definite yet

By Paul Deckelman

New York, Aug. 11 - Granite Broadcasting Corp. said Thursday that it is looking to make "changes to our asset mix in order to improve our capital structure and liquidity" - but the New York-based television station group owner offered little in the way of specifics on its conference call with analysts following the release of 2005 second quarter earnings.

Company executives also indicated that there shouldn't be any problem in making the upcoming Dec. 1 coupon payment on the company's 9¾% senior secured notes due 2010, even if no asset sale is made before then - but they admitted that moving into 2006, liquidity would be a matter of concern.

They also said that making an offer to repurchase those bonds would be one possible option for using the proceeds of any asset-sale transaction(s). However, before any such plans can be made, they said that doing asset transactions would be the top priority.

The company's chairman and chief executive officer, W. Don Cornwell, said that the second quarter ended June 30 was "a very successful quarter" for Granite, and management was "very pleased" with the quarter's results, which "met or exceeded guidance," including a 33% jump in broadcast cash flow.

Although Granite - which owns, operates or provides sales and programming services to 13 stations in eight U.S. television markets, notably including Detroit, San Francisco and Buffalo - reported a wider net loss for the quarter from a year ago ($16.207 million or 83 cents per diluted share, versus $15.703 million or 81 cents per share), Cornwell, chief financial officer Lawrence I. Wills and chief operating officer John Deushane noted on the call that net revenues for the quarter grew to $31.011 million from $29.063 million a year ago, and station operating expenses and Granite corporate expenses were both lower. That produced a swing to an operating profit of $2.119 million, versus a year-earlier $365,000 operating loss.

The wider net loss for the quarter was chiefly attributable to a rise in interest expense, to $11.141 million from $9.872 million the year before, in the wake of the company's three-way transaction earlier in the year with two other broadcast station owners, Malara Broadcast Group Inc. and New Vision Group LLC. Although Granite technically does not own Malara, it is deemed to be the "primary beneficiary" of Malara and thus consolidates its financial results with Malara's, including the latter's debt position, and Wills said that Granite's interest expense for the quarter includes $1.3 million of interest costs at Malara.

Granite actually stands as the guarantor for $53.5 million of financing which Malara used to acquire Granite's station in Fort Wayne, Ind. Granite, meantime, bought another station in that same market from New Vision Group, while Malara concurrently also bought New Vision Group's station in Duluth, Minn. as part of the complex transaction, using some of the Granite-guaranteed funding for the purchase. That financing consisted of a $23.5 million term loan A secured by a letter of credit, which Granite backs with a pledge of $25 million of U.S. government securities, as well as a $25 million term loan B and a $5 million revolving loan, which are collectively secured by the assets of the two TV stations Malara bought, and which are guaranteed on an unsecured basis by Granite.

Wills told an analyst during the question-and-answer portion of the conference call that followed the company's formal presentation of its results that a small portion of that Malara debt had been paid down - it made payments on the revolver, although the CFO did not say how much of the debt had been eliminated this way.

Unrestricted cash declines

As of June 30, Wills said, Granite had $45 million in cash on its balance sheet, although that figure includes the $25 million that Granite put up to buy the government securities backing Malara's letter of credit; it is considered restricted and cannot be used for working capital or other purposes, as Wills told an analyst who asked about its availability. Excluding that $25 million, Granite's unrestricted cash for the quarter was $20 million, down from the $37.191 million of unrestricted cash, cash equivalents and marketable securities - and specifically excluding the $25 million - that the company had on hand as of May 9, just before it filed its 10-Q quarterly report with the Securities and Exchange Commission for the period ended March 31.

As of the end of the second quarter, the company had $458.5 million of outstanding debt, including Malara's obligations. There was also $200.4 million face amount of preferred stock, and $83.3 million of accrued and unpaid dividends.

"We are focused on our liquidity position and are confident that we will change our asset mix to address our long-term liquidity position," Wills asserted on the conference call.

Moving in "near term"

Cornwell said that while the company has made "substantial progress" in growing its operating cash flow, Granite "will move ahead in the near-term" with making changes in its mix of assets in order to improve the capital structure and liquidity. "We remain focused on growing our cash flow and improving our capital structure," the CEO declared.

Those declarations by the company's executives - essentially, that Granite looks to asset sales to improve its capital structure and better its liquidity situation - break no new ground. In its first-quarter 10-Q, Granite warned that "[a]bsent changes to its capital structure and station ownership, the company may not have enough liquidity to service its existing obligations over the next 12 months. In order to improve the company's existing liquidity position, the company is currently exploring the sale of assets and the raising of additional capital."

Indenture limits

However, Granite is hobbled by indenture clauses that restrict its use of any net proceeds that it may generate by, say, selling a TV station or two - a point that Cornwell was forced to reiterate to an analyst who asked how much flexibility the company might have in using any asset-sale proceeds, for instance, to make scheduled interest payments.

The answer - no can do.

"Our indenture is very specific in what we can use [asset transaction] proceeds for," Cornwell said. "We will not be able to use asset-sale proceeds to make coupon payments."

Granite is allowed to use up to $5 million of any asset-sale proceeds for working capital purposes. After that, the proceeds must be used only either to invest in assets that would replace the assets that were sold, or to offer to buy back its bonds, or a combination of those two purposes.

Cornwell told an analyst that Granite could not say at this point which it might do - or whether it might both invest the proceeds back in the business and make an offer to the bondholders, "neither of which is a bad outcome" - but he added that "we'll make that decision as we go forward. We can't predict that at this point."

Granite said in May that assuming it is successful in selling assets and raising additional capital, "it believes that the available proceeds together with the cash, cash equivalents and marketable securities on hand and internally generated funds from operations will be sufficient to satisfy our cash requirements for our existing operations for the next 12 months."

However, it warned that "a lack of liquidity would have a material adverse effect on the company's business strategy and therefore affect its ability to continue as a going concern."

Wills, in answer to an analyst's question, said that "we are very confident that we will be able to make the coupon [on the 9¾% bonds] in December," when Granite must come up with just under $20 million, due on Dec. 1. "We will be in a slightly cash-building mode through the third quarter, and we'll certainly be able to make that coupon payment in December."

Liquidity "a concern" in 2006

Cornwell sounded a similar note - but acknowledged that "looking into 2006, clearly liquidity is a concern for us - that's why we're focused on an asset sale. We intend to get something done, and that's what we're really focused on at this point."

Cornwell and his fellow executives rebuffed the analysts' repeated efforts to extract any information from them as to which of the company's assets it might be shopping around, who the prospective buyer - or buyers - might be, a likely timeframe for a transaction, or a ballpark figure for the amount of any proceeds that might be generated by such a sale, or sales. The CEO also chose not to elaborate on whether Granite might undertake any other kind of financing transactions concurrently with an asset sale.

"The only way we can respond is simply to say that when we have something to report - we will," the CEO said. "We are clearly very focused on this and intend to get something done. But I can't say anything more than that."

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