The question that is this post's title occurred to me as I read through this report earlier today by Seth Sutel of the Associated Press. I believe the question is important, and that its potential implications are underappreciated.
Sutel first summarized the week's financial events in the media business. It wasn't pretty:
Even for an industry awash in bad news, the newspaper business went through one of its most severe retrenchments in recent memory last week.
Half a dozen newspapers said they would slash payrolls, one said it would outsource all its printing, and Tribune Co., one of the biggest publishers in the country, said it might sell its iconic headquarters tower in Chicago and the building that houses the Los Angeles Times.
The increasingly rapid and broad decline in the newspaper business in recent months has surprised even the most pessimistic financial analysts .....
In a supreme irony, a media trade group, representing those who continually demand full disclosure from politicians, parties, political groups, businesses, and other organizations, is reducing the public visibility of its own industry information:
Advertising is by far the most important source of revenue for newspapers. And in the first quarter, their overall ad revenue slumped 12.9 percent, led by a 24.9 percent drop-off in classifieds, compared with the same period a year earlier.
In fact, the industry group that compiles and releases ad revenue figures, the Newspaper Association of America, this month stopped putting out quarterly press releases with the numbers, though it quietly updated them on its Web site.
NAA spokeswoman Sheila Owens said in an e-mailed statement that the organization will now put out press releases only with full-year data "to keep the market focused on the longer-term industry transition from print to a multiplatform medium."
But it's the final paragraph in Sutel's piece that is the most troublesome:
Given the current poor climate for the business, (Emile Courtney, a media industry credit analyst for Standard & Poor's) said: "I have doubts banks will be as willing as they were in the past to waive or amend covenants."
"Covenants" are financial requirements borrowers agree to meet as conditions for obtaining financing and continuing to remain in good standing with their lenders. Without getting too detailed, typical covenants could include promises to have annual financial statements audited, and to get "clean" auditor's reports as a result of those audits; to continually maintain certain levels of liquidity, such as ratios of current assets to current liabilities; to achieve minimum levels of quarterly cash flow; and to limit pay to key executives.
A covenant violation is potentially a very serious matter. Very often, an understanding lender will "waive" a violation if it feels that it was a one-time problem, and that the borrower's overall financial viability is not in jeopardy. But it's a fact that any time a borrower fails to meet any one of the agreed-upon covenants, the lender has the legal right to "call" the loan, meaning that it must be repaid in full immediately. Frequent covenant violations, especially if the borrower is in an industry experiencing serious problems, or if the borrower appears unable to get back into compliance, increase the likelihood that the lender won't grant waivers, but will instead call the loan. If such a call occurs, a borrower unable to find alternative financing can be forced to go into bankruptcy or liquidation.
It doesn't take a lot of imagination to understand that a highly-leveraged media company in dire financial straits that knows it is in danger of violating covenants -- or, even worse, has been doing so for some time and realizes it may be living on, if you excuse the expression, borrowed time -- could be a very dangerous player in covering and reporting the news. Among the many possibilities: It might lighten up, or even puff up, its coverage of a person or group with a chance to financially harm it, such as a major advertiser, politician, political party, or the lending bank itself. Or it might overreact and become recklessly aggressive and sensationalist in a desperate attempt to get more attention, readership, and cash flow.
On the plus side, you might hope that serious financial times might cause the media companies involved to question whether they need to move away from the insufferable bias and political correctness that permeates so much of their reporting, and that has been chasing readers away for so many years. That would be nice, but I am not the first to observe many of the journalists at these companies would rather see the ship sink than make this common-sense adjustment.
Thus, I believe it's fair to say that the conduct and motivations of reporters, editors, and editorialists whose companies are experiencing financial difficulty deserve special scrutiny, especially during this election year.
Cross-posted at BizzyBlog.com.
