The Media sector of the Morningstar US High-Yield Bond Index has produced more distressed bond debt in 2023 than any sector other than Healthcare. In this Deep Dive, we take a closer look at how cord-cutting and a slowing economy are uniquely impacting various Media-sector issuers.
Lay of the land
Media is the second largest sector, by par value, in Morningstar’s $1.4 trillion high-yield index, with $138 billion, or 10% of the index, as of Feb. 28. The sector includes 130 bonds, 22 of which were marked at option-adjusted spreads of 1,000 basis points or more, the well-accepted starting point for distress. That translates into $22.8 billion par value of distressed debt and a distress ratio of 16.46%.
Meanwhile, Healthcare has been the leading distress-producing sector since at least the summer of 2022, yet it is only the high-yield index’s third-largest sector. Around $25.2 billion par value of the sector’s bonds were distressed as of Feb. 28, or nearly one-quarter of all distressed volume, for a distress ratio of 22.18%. (See Deep Dive: Healthcare tops distressed bond and loan index leaderboards for more on distress in the Healthcare sector.)
Lately, second-place Media has been gaining on Healthcare, cutting the sector’s lead in distressed debt nearly in half during the past month. On Jan. 25, there were $4.6 billion more distressed Healthcare bonds than distressed Media bonds. But as of Feb. 28, Healthcare’s lead was down to $2.4 billion.
One sector that is not a factor in the distressed bond count is Energy, the Morningstar US High-Yield Index’s largest sector, containing $159 billion in par value of bonds. Just two of Energy’s 267 bond issues are marked at distressed levels, with $1 billion of par value between them and yielding a microscopic distress ratio of 0.65%.
Loans tell a different story
The Morningstar LSTA US Leveraged Loan Index tells a somewhat different distressed story than high yield (leveraged loans are considered distressed if marked under 80).
First, Software is the largest leveraged loan sector with $169 billion in loans as of Feb. 28, and Healthcare is a close second. Media is well down the list, at $77 billion. Energy is even further down, at $19 billion, with no loans marked under 80.
Second, the distress ratios for Media and Healthcare are markedly lower than the sectors’ high-yield distress ratios. Media’s leveraged loan distress ratio as of Feb. 28 was 7.55%, less than half of its 16.46% high-yield distressed ratio. Similarly, Healthcare’s leveraged loan distress ratio of 15.15% is well below its high-yield ratio of 22.18%.
Third, the amount of high-yield distressed debt in both the Healthcare and Media sectors, measured by par value, grew in February, but both sectors’ leverage loan distressed debt tallies declined. In the high-yield index, Healthcare’s distressed debt total gained $500 million during the month, while Media’s distressed subset leapt ahead by $2.7 billion. On the other hand, in the leveraged loan index, Healthcare’s distressed load fell by $800 million during February, while Media’s distressed subset lightened by $400 million.
Ripped cords
Most of the issuers of troubled Healthcare sector bonds could point to two primary causes of their difficulties: declining revenue and inflationary increases in expenses, particularly staffing costs. Media sector distressed debt can also point to two dominant challenges: the weakening economy and cord-cutting.
Since last year, economists have been predicting an impending US recession. S&P Global Ratings’ economists are expecting a mild recession in 2023’s first half. Investment banks are saying the same thing, predicting anything from merely a slowing of growth to outright recession this year (see US Distressed Outlook: 2023 investing landscape may offer richer opportunities). The slowdown has a direct negative impact on media company revenues, and company managements have not been shy about raising it in their financial reports.
Media-sector companies have not avoided shouting about the damage from cord-cutting, either. Traditional cable and satellite TV companies lost 1.7 million subscribers in 2022’s third quarter, an acceleration from the 1.3 million subscribers lost in the year-earlier quarter, according to Leichtman Research.
To put that into broader context, 50 million adult viewers left pay-TV between 2016 and 2021, according to market research firm Insider Intelligence. In fact, the research company expects that in 2024, for the first time the US will have more cord-cutters and “cord-nevers” than pay-TV subscribers. And by 2026, Insider Intelligence estimates that only 42.4% of all US households will have pay-TV subscriptions, down from 52.4% in 2022.
S&P Global Ratings succinctly summarized the situation in its 2023 Media and Entertainment Industry Top Trends report, writing, “Linear TV's decline is accelerating with higher cord cutting, declining audiences, and weakened advertising.” One direct result, as leveraged debt investors know, is more distressed media bonds.
Two-fer
The combined negative impacts of cord-cutting and a slowing economy can be seen in the S&P Global Ratings downgrade last December of privately held Allen Media Group (AMG), which has one distressed bond in Morningstar’s US High-Yield Bond Index. The agency said about Allen — which owns network-affiliated television stations and The Weather Channel, among other media assets — that “secular challenges from cord-cutting and macroeconomic headwinds are negatively affecting the broader media industry,” adding that “we expect AMG's cable networks to face cord-cutting pressure similar to the broader industry's (5%-7% declines).”
On the other hand, cable company Altice USA, with four distressed bonds in the index, alluded to cord-cutting without mentioning the term. It noted in its 2022 Form 10-K that video revenue declined by 7% in 2022 over 2021, “primarily due to a decline in video customers.” Not immune to the economy’s travails, the company also said its labor costs are rising.
DISH Network, with three distressed Media-sector bonds, was more upfront about the damage from cord-cutting. In its year-end 2022 10-K, the company wrote, “Our Pay-TV services also face increased competition from programmers and other companies who distribute video directly to consumers over the Internet.” Adding detail, DISH TV said it lost 805,000 subscribers in 2022, compared with 595,000 subscribers the prior year.
Collateral damage from cord-cutting is impacting Diamond Sports Group, which missed paying interest on Feb. 15 on two distressed bond issues. The company owns regional sports networks (RSNs) which show local professional sports on cable channels, covering teams in both major markets (Los Angeles and Miami, for instance) and smaller markets (such as Detroit, Minneapolis, and Tampa Bay). The company’s reliance on cable has hurt revenue as cord-cutting whittles down the cable companies’ subscriber bases.
Three strikes
The slowing economy is impacting media company advertising revenue, a result that can be seen in a trio of distressed Media-sector issuers. With two bonds trading at distressed levels, Audacy Inc.’s third-quarter report cited the economy for its failure to grow revenue, saying, “Due to the current macroeconomic conditions, the month-over-month improvement in net revenues did not continue into the third quarter of 2022.”
Expanding on the current economic environment, Audacy said, “The COVID-19 pandemic and current macroeconomic conditions have created, and may continue to create, significant uncertainty in operations, including disrupted supply chains, rising inflation and interest rates, and significant volatility in financial markets.” All those issues are combining to have a “material impact” on Audacy’s operations, the quarterly report said.
In-theater advertiser National CineMedia, with a single distressed issue that is currently in the grace period after the company missed paying the Feb. 15 coupon payment, is being tested both by the economy and by the slow return of movie audiences to theaters. S&P Global said about the company that “the advertising market is historically heavily correlated to GDP growth,” adding that “advertising clients will likely lower their spending on advertising for noncore platforms such as cinema.”
The single bond issued by digital marketing services company Centerfield Media is also distressed. In S&P Global’s research report supporting its downgrade of Centerfield to CCC+, the agency enumerated “the uncertainty related to an economic downturn, rising interest rates, supply chain issues, and inflation” as all negatively impacting Centerfield's advertising revenue.
Mobile game platform builder Skillz Inc. has one bond on the Media distressed list. Revenue has been plummeting, with third-quarter 2022 revenue off 41% from the prior year. In its third-quarter 10-Q it said revenue loss came from “lower retention from existing user cohorts driven by a combination of factors, including past product changes, which together have had a negative impact on overall user experience.”
On the flip side, PitchBook gaming analyst Eric Bellomo wrote in a Gaming Sector launch report published in February, “We estimate the overall market for gaming to be $447.3 billion in 2022 and to reach $562.3 billion by 2026, representing a CAGR of 5.9%.” That’s the sort of market growth cable companies would long for.
Featured image by J. J. Gouin/Shutterstock
This article originally appeared on PitchBook News
