Cox Media’s debt financing backing its acquisition by Apollo allows for ample free cash flow, but weak investor protections are also top of mind for buysiders, according to nine sources familiar with the matter. In particular, Cox’s ability to pay sponsor dividends soon if not immediately at deal close has garnered pushback, and is squarely in investor crosshairs for possible revision, said four of the sources.

Proceeds from a USD 1.875bn term loan due 2026, USD 1.165bn senior unsecured notes due 2027 and a USD 1.12bn equity contribution are slated to fund Apollo’s acquisition of Cox Enterprises’ TV and radio assets and fellow television broadcaster Northwest Broadcasting.

The Ba3/BB- loan, led by RBC and guided at Libor+ 400bps-425bps with a 99 OID, is oversubscribed, while the bonds are struggling to gain momentum at current whispers in the low-8% area, four of the sources said.

The JPMorgan-led Caa1/CCC+ notes began roadshowing on 5 December and are expected to price tomorrow (12 December). Commitments for the loan are also due tomorrow.

Cox is marketing the deal based on USD 505.5m of pro forma adjusted last-eight-quarters-annualized (L8QA) EBITDA. The company uses the L8QA adjusted figures to normalize the effects of 2018’s spike in political advertising due to the mid-term election.

Nearly half or roughly USD 240m of the company’s roughly USD 506m of pro forma L8QA EBITDA estimate consists of addbacks, with USD 58m in estimated net transmission synergies and USD 43m in station-level cost savings. The remainder of the addbacks is attributed to USD 121m of costs related to Cox’s reliance on CEI.

Several sources view Cox’s adjusted EBITDA as in the USD 450m area, primarily due to not giving credit for net transmission synergies – considering nearly half of the company’s contracts expire in 2020.

The expirations on the horizon increase the possibility of blackouts, which could offset any increase the company is expecting with synergies or due to an election year, according to four of the sources.

The company is marketing the deal on 3.7x leverage through the term loan and 6x total, based on the USD 506m in adjusted EBITDA. The figures move to 4.2x secured and 6.8x total at the lower USD 450m figure.

Based on the company’s projections, pro forma free cash flow shakes out to roughly USD 256m (8.4% of total debt), based on USD 506m of adjusted EBITDA, USD 30m of capital expenditures and USD 220m of pro forma interest expense. At USD 450m of EBITDA, free cash flow would come in around USD 200m (6.6% of total debt).

Short path to dividends

As far as covenants go, the bond documents contain several flaws, according to four of the sources. For one, sources are apprehensive of Apollo being able to take a dividend shortly after syndication as the builder basket doesn’t contain a financial test, the sources said.

“A very Apollo-y thing to do, a new flavor of [covenant] badness,” one of the sources said.

The documents also allow for several carve outs for credit facility debt, one of the sources added.

“In general, this is one of the worst documents I’ve seen. It’s ripe for negotiation,” the source said.

Debtwire affiliate Xtract Research assigned a covenant score of zero out of 10 to the loan issuance, with zero representing the weakest possible lender protections and 10 representing the strongest.

That compares to a market score of 4.9. The market score is the average score for all loans Xtract has reviewed for sponsored borrowers that have an opening EBITDA of USD 100m or more in the six months preceding the credit agreement.

On a relative value basis, sources predict Cox pricing well wide of fellow broadcasters Nexstar, Gray Television and Sinclair due to the CCC-risk of the proposed notes, Cox’s smaller comparative scale and Cox’s higher exposure to the radio space.

Cox’s revenue comes from two main segments: television stations (72% of L8QA adjusted net revenue) and radio stations (28% of revenue), according to company documents.

Nexstar’s recently issued B3/B USD 1.785bn senior unsecured notes due 2027 traded yesterday at 105.5 to yield 4.5%, in line with recent levels, according to MarketAxess.

Also recently in the market, Sinclair’s B1/B USD 500m senior unsecured notes due 2030 traded yesterday at par, up slightly from last week’s levels in the 99 range, according to MarketAxess.

Gray’s B3/B+ USD 750m 7% senior unsecured notes due 2027 traded on 6 December at 111.291 to yield 4.142%, up slightly from recent trades in 110 range.

Pro forma liquidity includes only its undrawn USD 325m revolver.

JPMorgan declined to comment. Cox did not respond to a request for comment.

2019 Debtwire