Gray Television will pay down term loans in its efforts to deleverage

By Devika Patel

Knoxville, Tenn., Nov. 8 – Gray Television, Inc. plans to continue lowering its leverage and will devote cash to paying back debt, including term loans which have no prepayment penalties, as well as funding a stock buyback program. The company plans to complete its deleveraging efforts within three years and have a leverage ratio of about 5.75x by Dec. 31.

“We remain relentlessly committed to lowering our leverage,” vice chairman, president and chief executive officer Hilton H. Howell said on the company’s conference call Tuesday, announcing third quarter earnings.

“We will judiciously exercise our new authority to repurchase stock with a close eye on our total leverage.

“Simply put, we anticipate that the total [stock] repurchases in any given year will range approximately between 10% and 20% of our free cash flow.

“The size of the [stock] buyback program provides us with the flexibility we need to pursue buybacks at the appropriate time while still leaving significant free cash flow to delever over the next three years,” Howell said.

Chief financial officer and executive vice president James C. Ryan said that the company plans to use excess cash to pay down term loans.

“As of today, we have approximately $290 million of cash on hand which is well in excess of the $270 million we need to close the Green Bay and Davenport acquisitions that are still pending.

“There’s no prepayment penalty [to pay down term loans], so as we accumulate free cash, from time to time, as we move through 2017, we’ll probably be paying down term loan.”

The company expects a leverage ratio of about 5.75x by Dec. 31, Ryan said. It expects to have a leverage ratio in the fours by the end of 2018.

As of Sept. 30, the company’s leverage ratio under its senior credit agreement, netting all cash on hand, was 5.27x. Its total debt is $1.756 billion, which is all long-term debt with long-term maturities.

Gray Television has a blended cash interest rate of 5.05% and the refinancing that it did in September is saving $12 million a year annually in cash interest expense.

Record despite political miss

The company reported record revenue, but despite inventory displacement resulting from political advertising and the Olympic Games, its core revenue was flat compared to the same period in 2015.

Gray achieved “disappointing” political revenue of $22.3 million in the third quarter of 2016. For the full-year of 2016, it expects total political advertising revenue in the range of $89.5 million to $90.5 million, assuming no run-off or other elections in our markets before the end of the year.

The company’s third quarter of 2016 political revenue was $23.1 million, and its estimate for full-year 2016 political revenue is $91.8 million to $92.8 million.

“This year’s political election season presented extraordinary challenges from the top of the ticket to the bottom, especially after mid-September,” Howell said in a press release.

“These challenges created a ‘perfect storm’ for our political revenue.

“Earlier this year, a large number of races were expected to be highly competitive and political fundraising appeared to be highly encouraging through the summer.

“However, actual spending by candidates, political parties and third-parties fell far short of expectations, especially in Gray’s markets.

“The political uncertainty also appears to have led to significant economic uncertainty and created new headwinds for our core business that we hope will dissipate as the results of today’s elections are announced tonight [Tuesday].

“In any event, the political revenue results and uncertain macro environment make it more likely that Gray will place the highest priority on debt repayment over the next four to five quarters.”

Note sale

On Sept. 7, Gray Television priced $725 million of senior notes (B2/B+) in two tranches, featuring $525 million of new eight-year notes, which priced at par to yield 5 1/8%, and a $200 million add-on to its 5 7/8% senior notes due 2026 at 103 to yield 5.398%.

Wells Fargo Securities LLC was the left bookrunner. BofA Merrill Lynch, RBC Capital Markets and Deutsche Bank Securities Inc. were joint bookrunners.

The Atlanta-based owner and operator of TV stations used the proceeds to fund the tender for its 7½% notes due 2020.

Note tender

On Sept. 7, the company began a cash tender offer for its $675 million of 7½% senior notes due 2020. The company offered to pay $1,042.20 for each $1,000 of notes plus accrued interest to but excluding the payment date of Sept. 14. The tender offer ended on Sept. 13.

On Sept. 14, Gray Television received and accepted $431.24 million, or about 63.89% of the outstanding principal amount, of notes tendered under its cash tender offer for its $675 million of 7½% senior notes due 2020. The company paid a total of about $464.1 million for the tendered notes.

The company funded the redemption with the proceeds of the $525 million sale of 5 1/8% notes due 2024 and a $200 million add-on to its 5 7/8% notes due 2026. Any remaining proceeds were used to redeem any 7½% notes that remained outstanding after the tender offer settled. The company redeemed the remaining notes on Oct. 13 at 103.75 plus accrued interest to but excluding the redemption date.

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