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Is CBS Really Going Bankrupt?

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Two weeks ago, CBS was flagged by Audit Integrity as one of 10 big companies at risk for bankruptcy.

This prompted an outraged denial by CBS.

Now, as the banking collapse illustrated, any time a company denies that it's about to go bankrupt, it makes sense to assume that the company is indeed about to go bankrupt--and then analyze the situation for yourself.

I did that for CBS. Here's the bottom line:

CBS is not on the verge of bankruptcy. The company is, however, highly leveraged, and its cash flows have been deteriorating rapidly. So if current trends continue, the company will be forced to cut more costs or risk violating debt covenants. If CBS's cash flows keep deteriorating after that, it will very much be on the verge of bankruptcy.

CBS has also blown billions in recent years stupidly buying back its own stock at much higher prices--shareholder value destruction at its finest. So the company's weak financial position is very much of its own making.

THE SITUATION

Here's a snapshot of CBS's current financial position:

Cash: $341 million
Debt: $7 billion

That's called leverage!

Meanwhile, CBS's cash flows have been precipitously declining:

2006 Free Cash Flow: $1.5 billion
2007 Free Cash Flow: $1.7 billion
2008 Free Cash Flow: $1.7 billion
2008 Free Cash Flow (through June): $1.4 billion
2009 Free Cash Flow (through June): $250 million

In other words, cash flow for the first six months (operations less capex) dropped from $1.4 billion to $250 million in a single year. CBS had better hope those trends don't continue.

Importantly, right now, the cash flows from CBS's business are still positive. This will make it much easier for CBS to continue to roll over its debt (which it has been doing) and avoid violating its debt convenants, which it may be coming close to doing.

CBS's cash flows have fallen so much, however, that it is running out of cash flow from operations to make its dividend payments. (So far this year, CBS has paid $228 million in dividends, which pretty much wipes out its cash flow.) This is why CBS recently slashed its dividend to $0.05 per share. If CBS's cash flows deteriorate further, the company might have to discontinue its dividend completely.

Any time a company has as much debt as CBS does relative to its cash balance, it is critical that the company be able to continue to roll its debt over--paying back upcoming bonds by issuing new bonds with later maturities. Fortunately, at least as of this spring, CBS still seems to be able to do this:

On May 13, 2009, CBS Corp. issued $350.0 million of 8.875% senior notes due 2019 and $400.0 million of 8.200% senior notes due 2014. On June 2, 2009, CBS Corp. issued $250.0 million of 8.875% senior notes due 2019. Interest on these senior notes will be paid semi-annually. The senior notes are fully and unconditionally guaranteed by CBS Operations Inc., a wholly owned subsidiary of CBS Corp.

During the six months ended June 30, 2009, the Company repurchased $978.3 million of its 7.70% senior notes due 2010 resulting in a loss on early extinguishment of debt of $29.8 million.

As long as CBS can continue to issue new debt to repay its old debt, it will be fine. What will cause it NOT to be able to issue new debt will be if its cash flows fall so low as to violate its debt convenants (which could technically put it in default), or if the credit markets seize up again. This could make it harder for the company to issue new debt.

Right now, as long as CBS's cash flows don't fall much farther, it has a $3 billion line of credit it can draw down to make interest and other payments. If CBS thinks its cash flows are going to deteriorate further, the company will likely draw down hard on this line to make sure it has enough cash going forward. As of June 30, the company had some clearance left:

At June 30, 2009, the Company had a $3.0 billion revolving credit facility which expires in December 2010 (the "Credit Facility"). The Credit Facility requires the Company to maintain a minimum Consolidated Coverage Ratio, as defined in the Credit Facility, of 3x for the trailing four quarters. At June 30, 2009, the Company's Consolidated Coverage Ratio was approximately 4x. The primary purpose of the Credit Facility is to support commercial paper borrowings. At June 30, 2009, the Company had no borrowings outstanding under the Credit Facility and the remaining availability under the Credit Facility, net of outstanding letters of credit, was $2.80 billion.

So, depending on what happened in Q3, CBS may still be able to draw down on this line. This should allow the company to meet all of its near-term cash needs, even if it suddenly can't roll over its commercial paper or debt.

IMPORTANT: If there is any risk that CBS's trailing cash flow ratio will fall below 3X--which there would appear to be, given the rate of decline over the past year--CBS should draw down hard on the line to give itself some breathing room. Hopefully, it has already done this.

WHAT HAPPENS IF THE ECONOMY CONTINUES TO DETERIORATE?

Assuming ad spending has bottomed, CBS will be fine. If ad spending continues to shrink, however, the company will have to cut costs to keep its cash flows strong enough that it doesn't violate its debt convenants.

CBS says it has the ability to manage programming and other costs, so reducing its cost base modestly shouldn't be a problem:

To the extent that the Company's future operating cash flow is negatively impacted by the continued weakened economy, the Company has the ability to curtail certain non-committed programming, capital and other spending.

So if ad spending continues to shrink, CBS will likely cut the spending referred to above. If spending continues to shrink after that, it will have to cut more. Eventually, it will run out of things it can cut without destroying the value of the business, at which point bankruptcy will be a real risk.

THE BOTTOM LINE:

CBS does not appear to be at risk of near-term bankruptcy. It is in a weak and deteriorating financial position, however. And this condition is in large part due to its own stupidity.

Like other media companies, CBS has blown billions of dollars buying back its own stock in recent years--at prices 2X-3X today's demolished level. This is shareholder-value destruction at its finest. And it has put the company in a far weaker position than it should be today.

See Also:

10 Big Companies Veering Towards Bankruptcy