The Billboard Insider Podcast
00:13:16 · Dave Westburg, John Weller
[00:13:16] S0: So what do I do if I am in poor health and I may have a medical condition that makes key man difficult, prohibitively expensive, impossible to get? [00:13:27] S1: Well, from a lending standpoint, what we want to see is that there's some level of transition set in place, so that we know as a lender that if something were to happen to... In a lot of small businesses, it's one person who who basically is making the bulk of the decisions. And if there's a plan in place for another qualified individual, whether it be a family member or a trusted employee, where they will step in and run the business and be able to demonstrate they have the capability, That's a very important thing to have and to make a lender aware of as as they're looking at the possibility of having you as a borrower. [00:14:09] S0: John, I wanna switch gears and go macro, go from individual lending situations to a sort of macro industry as a whole. Let's start first with the big three public U. S. Out of home companies. In one word, how would you evaluate the leverage of the three public US out of home companies? Let's start with Lamar. [00:14:32] S1: Oh, wow, you're putting me on the spot. Lamar, my one word for them would be consistency. And the reason for that is they typically have lower leverage. I think currently their ratio of debt to equity is about 3.3 times, and that provides them room for growth like we recently saw with the Fairway acquisition. Consistency for Lamar would be a good one word. [00:14:56] S0: How about out front?
00:14:56 · Dave Westburg, John Weller
[00:14:56] S0: How about out front? [00:14:57] S1: Out front, I would, the one word I would use for out front is aggressive. They obviously have been making big bets on transit, particularly with their New York and Boston contracts, And leverage is a bit higher, but still within reasonable range, but it's higher than Lamar. They tend to run-in about the four and a half range. [00:15:17] S0: And that brings us to Clear Channel. [00:15:19] S1: Yeah, that one's a little more interesting. I'll say my one word for Clear Channel is uncertainty. They're currently leveraged at over eight times, which is too high. I mean, it needs to over time be brought down lower. And the uncertainty is what happens later this year when iHeartMedia moves out of bankruptcy and Clear Channel separates from iHeart. There's a lot of opportunity, but what happens may depend on their ownership group, which initially will be made up of the iHeart lending group. Personally, know, having spent some time in the lending community, I don't think they're gonna be a very patient group and they may look to monetize their investment, which could create some interesting situations for Clear Channel. But keep in mind, and as most people who've read us on Insider, I mean, we are Clear Channel fans and have felt all the way along that if they could get separated from my heart, that there was a lot of opportunity for Clear Channel.
00:15:19 · John Weller, Dave Westburg
[00:15:19] S1: Yeah, that one's a little more interesting. I'll say my one word for Clear Channel is uncertainty. They're currently leveraged at over eight times, which is too high. I mean, it needs to over time be brought down lower. And the uncertainty is what happens later this year when iHeartMedia moves out of bankruptcy and Clear Channel separates from iHeart. There's a lot of opportunity, but what happens may depend on their ownership group, which initially will be made up of the iHeart lending group. Personally, know, having spent some time in the lending community, I don't think they're gonna be a very patient group and they may look to monetize their investment, which could create some interesting situations for Clear Channel. But keep in mind, and as most people who've read us on Insider, I mean, we are Clear Channel fans and have felt all the way along that if they could get separated from my heart, that there was a lot of opportunity for Clear Channel. [00:16:16] S0: Freedom is a good thing for Clear Channel. John, you've been in the out of home lending business now through three business cycles. Let's talk about the current lending market and where are we in the current lending, out of home lending cycle?
00:16:33 · John Weller
[00:16:33] S1: Well, it's an interesting time. I mean, obviously the lending industry tends to be very predictable and it would be nice if, you know, it was a little less predictable in terms of cycles, but typically as you go through a cycle, you'll come out of a recession, whether it be a short recession or, you know, obviously our last recession was very prolonged. And then you're dealing with practical conservative lenders. You'll see that typically right after a downturn where they'll stay, kind of stick to their knitting and say, these are good conservative standards we wanna live by. The next phase you're gonna see will be lenders searching for growth. And typically that's when their growth in profits is slowing from their existing customers. And so you'll start to see a push to bring in new business. The next cycle, and this is probably where we are right now, Dave, I would call it a frenzy of growth. The lending market will become very aggressive in search for growth opportunities and start looking beyond traditional markets to maybe consider some other markets. And we're in this part of the cycle, and it has been very favorable to outdoor. And then typically as you enter into recession, you know, they're gonna pull back and we're gonna start the whole cycle all over again, but that pullback usually means that it can be a little difficult on smaller owner operators if they have any kinds of issues, or if the interest rates get too high or they have trouble handling debt service, because the bankers tend to look to what they're familiar with, and tend to move away from those things, even though they made a commitment to the market in their growth frenzy, that they've decided maybe they need to pull back on it now.
00:18:15 · Dave Westburg, John Weller
[00:18:15] S0: It's a last in, first out phenomenon. It's the last market they got in, in a recession, and when the credit guy says, we really need to shrink, we gotta focus on what we do best, it's the first market that's jettisoned. [00:18:27] S1: Yeah, absolutely. And so Dave, I'm gonna ask you a question because obviously you're in the middle of this lending business with me too. And that would be, as we're looking at our current marketplace right now, where we're in a situation where, you know, there is a little, well, not a little, there's a lot more aggressiveness in the banking community. I mean, what are you seeing from your side and what are some suggestions or some things that you might suggest to the outdoor community?
00:18:57 · Dave Westburg
[00:18:57] S0: Clearly, is probably as favorable a borrower's market as I think we've ever seen. I tell people when I'm advising them, if you get a chance to do a multi year bank deal, do it because your credit terms, your pricing is as good as it's going to get, your credit terms are as loose as they're going to get. And if you can get a two year revolver or get a term loan, lock in your funds, it's a smart thing to be doing. We've been in an up and to the right environment for ten years. There's a whole generation of lenders that have not seen a recession, and they'll panic when we get into a recession. And so to put in place a multi year lending agreement is a good thing to do now. The other thing is there's a potential if we don't go in a recession, the Federal Reserve is shrinking its balance sheet. There's going to be more demand. All the securities that the Federal Reserve was sucking up to keep interest rates low, they're going to be shrinking. There's going to be, I think, some pressure, maybe some inflationary pressure. There's going be some pressure on interest rates, and an increase in interest rates could mean lower borrowing. I think when I've looked at the math, for every 200 basis point, or 2% increase in interest rates, the debt capacity of an out of home advertising company goes down by about a half turn. In other words, if an out of home company can borrow up to five times cash flow today at today's rates, if interest rates go up by 200 basis points or 2%, the debt capacity of that same out of home company, everything else the same, is only four and a half times. So I tell people, if you can get a multi year deal, get it. Run your business. Don't take crazy risks. Run your business. Be prudent. And when I think the true opportunities will show up will be if we hit a recession when lenders pull back and money's tight, then the true opportunities will show up. That's kind of my take. John, what do you think?