Warner Music Group cites benefits from recent refi deal, retains 'conservative' balance sheet focus

By Paul Deckelman

New York, Dec. 13 - Warner Music Group Corp. has begun a new fiscal year with the completion of what its chief executive officer described as a very "successful" November refinancing. The series of transactions, Stephen F. Cooper said, "increases our operational and strategic flexibility."

Cooper also told analysts on the company's conference call following the release of its results for the 2012 fiscal fourth quarter and full fiscal year ended Sept. 30 that even with this increased flexibility, it intends to take a "conservative" stance on maintaining its balance sheet and not running after potential acquisitions.

"They've got to be the right assets, at the right price, and, as I think we mentioned during the roadshow [for potential buyers of its new bonds and bank debt], we have no compelling need to bulk up just to bulk up," he noted.

Debt deals yield flexibility

The New York-based music publishing and recording company completed the refinancing of some of its existing indebtedness on Nov. 1.

As part of the transaction series, the company, acting through its WMG Acquisition Corp. subsidiary, sold an upsized $727 million equivalent of senior secured notes due 2021 in two tranches -- $500 million of 6% notes, which priced at par on Oct. 24, along with €175 million of 6¼% notes.

In the bank debt market, it entered into a new $600 million senior secured term loan facility at floating rates, including one at Libor plus 400 bps with a 1.25% Libor floor, while also retiring an existing $60 million revolving credit line and replacing it with a $150 million revolver.

The company used proceeds from the new debt, as well as $102 million of cash from its balance sheet, to repurchase via a tender offer most of its outstanding $1.25 billion of 9½% senior secured notes due 2016, which had been issued in two series.

At the Nov. 1 early tender deadline, holders had tendered $987.656 million principal of the outstanding $1.1 billion of the first series, or 89.79%, as well as $144.824 million principal amount, or 96.55%, of the $150 million of outstanding notes from the second series. Warner then called any remaining outstanding notes for redemption.

The company's executive vice president and chief financial officer, Brian Roberts, also noted on the conference call that it had obtained consent solicitations from its noteholders to amend the terms of those notes to increase the company's capacity to incur additional secured indebtedness in the future.

Cooper said that although Warner now has some additional flexibility for adding new secured debt, "that incurrence is always with an eye towards a conservative balance sheet and a conservative capital structure."

'Conservative' on acquisitions

During the question-and-answer portion of the call following the two executives' formal presentations, Cooper told an analyst who inquired what impact the increased debt capacity might have on the company's plans to expand by acquiring other record labels or music publishing firms, "If and when we do make acquisitions - again as we mentioned - with respect to our balance sheet, we also take a conservative view.

"We do not want to be in a position of being over-levered. The intent is to keep our ratios in line with a conservative approach to leverage and to utilize excess cash if and when we have it to continue to reduce debt.

"And, in fact, the terms and conditions of our bank debt reflect that conservative policy and that conservative outlook," Cooper stated.

Billionaire investor Len Blavatnik's Access Industries acquired Warner Music in a $3.3 billion transaction in 2011, and Cooper said that "this is a very long-term hold for Access, and this is about running a highly successful, highly sustainable business for essentially in perpetuity."

CFO Roberts said that the refinancing "provided us with more flexibility around our capital structure, particularly a greater ability to de-lever at our option."

Interest savings anticipated

Roberts said that as a result of the refinancing, the company expects annualized cash interest savings of some $42 million, although he cautioned that because it paid $93 million of tender call premiums, $34 million of consent fees and $45 million of accrued interest in connection with the retired debt.

"Therefore, in fiscal 2013, we will not immediately see the full cash impact of the interest savings," he added. The current fiscal year that began on Oct. 1.

Roberts said that free cash flow improved during the fiscal fourth quarter to $80 million from negative $52 million in the prior-year quarter, and for the full 2012 fiscal year, free cash flow of $151 million "compares favorably" to negative $221 million in the prior year.

He noted that in the year-ago periods, Warner Music had a number of unusual uses of cash related to its acquisition by Access, including $179 million of cash outflows paid to shareholders and option holders, net of capital contributions, $70 million of deferred financing fees related to new debt obligations incurred in 2011 in connection with the sale and $34 million cash paid for tenders, calls and interest related to the 2011 refinancing.

The company's cash balance stood at $302 million at Sept. 30. It was at $219 million at the end of the fiscal third quarter in June and $154 million at the start of the fiscal year.

Cooper said: "We continue to be very committed to delivering solid free cash flow in the quarters to come."

Roberts said that the December quarter, the first quarter of the fiscal year, is traditionally a negative working capital quarter due marketing outlays and the timing of collections on holiday sales.

Additionally, Warner had cash outflows in connection with the recent refinancing, with the use of the $101 million of cash from the balance sheet to complete the transaction.

"We continue to be keenly focused on cash management and remain comfortable with our ability to continue to generate cash over the course of the new fiscal year," the CFO said.

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