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Mediaworks Creditors Beware

Thomas Cranmer writes...
The future of Mediaworks now lies in the hands of its bankers led by Westpac. 
Yesterday Mediaworks described the Herald’s characterisation of the situation as alarmist. 
Judge for yourself. 
In December 2021 the company entered into a new syndicated facility arranged by Westpac which included a $110M term loan, $15M capex and $15M working capital facilities. 
The banking facilities included two financial covenants: leverage (net debt to EBITDA) and interest cover (EBITDA to net interest expense). Those covenants are tested quarterly (March, June, Sept and Dec) and measure the performance of the company. 
The covenants allow a certain amount of underperformance from the agreed base case model but usually underperformance of 20% to 25% will breach one or both of the covenants triggering an event of default. 
Having signed the new facilities in December 2021, the covenants needed to be amended in February 2023. 
Even after amending the covenants, the banks needed to waive the Sept 23 covenants (because without a waiver they would have breached them). The company is forecast to breach its covenants in December 23 and onwards thereafter. 
As a result the company is now locked in a ‘do or die’ renegotiation of its banking facilities with Westpac and its other lenders. 
The banks have deferred amortisation payments pending renegotiation of the facilities and are making short term working capital facilites available until 7 December. There is probably a small amount of flexibility in that date but the next covenant test date is 31 Dec which the company is projected to breach and there will be huge pressure on the banks internally to resolve this problem before year-end. 
For the company to have breached its covenants so quickly after putting new facilities in place is a total disaster both for the company and the banks. And the breaches are not just due to cyclical issues – they now appear to be persistent, meaning that it’s not viable for the company and banks to ride it out. 
The owners, Oaktree and Quadrant, will not want to inject any more capital into the business, and assuming a refinancing is not possible it will be up to the banks to decide whether they want to stick with it or pull the pin now. 
Even an amended covenant package and repayment schedule may not be sufficient to convince the banks to remain in the deal.
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