With troubled RSN owner Diamond Sports Group likely to file for bankruptcy protection this week, the immediate fallout on other broadcasters is expected to be contained, although the resolution of Diamond’s contracts and payments may be more difficult than some are expecting, according to analysts from Fitch Ratings.
On Thursday, Diamond will reach the end of the 30-day grace period to make a $140 million debt payment that was due on Feb. 15. Diamond has prepared the paperwork for a Chapter 11 bankruptcy filing, in which a company seeks to reorganize its debts and business with the intention of continuing to operate, according to numerous people involved in the discussions.
[UPDATE: Diamond filed for bankruptcy on Tuesday.]
Sometimes, when a high-profile company in a sector enters bankruptcy, investors start assuming similar businesses must be troubled as well. That’s not the situation for Diamond, whose issues aren’t seen as a potential market contagion for other broadcasters.
“On the face of it, I would say no because Diamond has some very issuer-specific problems,” Fitch Ratings senior director of U.S. corporate ratings Jack Kranefuss said in a video call.
Those problems primarily relate to the faster-than-expected decline in cable TV subscribers, which is reducing the fee-per-subscriber totals Diamond receives for its channels. While Diamond isn’t the only regional sports network operator facing that dynamic—indeed, Warner Bros. Discovery is also failing to meet its contractual obligations with its AT&T-branded RSNs—it appears the market isn’t extending that to other networks just yet.
“We are in the middle of an advertising recession,” Kranefuss added. “So any advertising-based business is seeing significant weakness, high single to low-teens [percentage] declines year-on-year, third and fourth quarters. And digital for the first time ever saw a decline in ad revenues. … How does that affect Diamond? Not really that much.”
Indeed, market conditions for broadcasters are benefitting from Diamond’s extensive signaling about its financial difficulty, said Eric Rosenthal, senior director of leveraged finance at Fitch. “This isn’t a surprise; we’ve known about this. Diamond did a distressed debt exchange back in March of last year,” Rosenthal said on a video call, referencing when Diamond reorganized its debt load by swapping $3 billion of existing debt for new paper, in what was technically a default on its obligations. The market has, he added, “had plenty of time to realize that they haven’t improved the situation enough.”
Fitch Ratings is an international credit ratings agency that rates and evaluates debt and market conditions for investors and loan issuers. It doesn’t have a public rating on Diamond.
Rosenthal, a high-yield expert, also says that investors in this corner of the debt world are sophisticated enough that Diamond likely won’t raise borrowing costs for other media companies, even as its expected bankruptcy will push the broadcasting’s default rate well above the average default rate for all corporate high-yield bonds. A Chapter 11 filing also is highly unlikely to trigger selling required by fund rules, a cascading effect that can happen when investment funds have a requirement to maintain holdings only in investment-grade bonds or stocks of a certain financial standing.
“Obviously it’s not great for the sector, but I don’t think this implies anything extra about broadcasting and media,” said Rosenthal.
In a sign of how the market sees Diamond as an isolated problem, the stock of owner Sinclair Broadcast Group actually rallied after deconsolidating Diamond from its business with last year’s distressed debt exchange, a move that dropped Diamond’s financials from Sinclair’s books. In part, that’s because Sinclair received a $3.4 billion tax benefit from the move. While Sinclair shares are down nearly 40% the past year because of the larger ad trends, its also enjoyed a one-day spike after buying the last of Diamond preferred equity from JP Morgan at a discount last month.
“We don’t control Diamond anymore. It is becoming increasingly independent,” Sinclair CEO Chris Ripley told analysts on a February earnings call. The JP Morgan deal was one more step toward eliminating financial risk to Sinclair, he explained.
Ripley declined to answer when an analyst asked if there are other ways Diamond could affect Sinclair in the future. While Diamond is deconsolidated, it is possible the company could end up having some exposure to Diamond’s liabilities through bankruptcy court or other legal challenges. In its annual report filed two weeks ago, Sinclair said of its equity stake in Diamond: “The value of the investment is zero.”
Still, the apparent cleanliness of Diamond’s entry into bankruptcy probably belies the difficulty the parties involved face in working through the bankruptcy, Kranefuss said. The primary problem will be balancing the needs and desires of everyone involved in the decision to either hold Diamond to the current contracts, renegotiate deals to reflect the weakening RSN model, or for teams to pull back the rights and produce and broadcast their own games.
“This isn’t like a normal situation where, if you’re a media conglomerate, you have one big-ego CEO. Here you have 46 teams, so 46 egos. Then there are the league egos,” Kranefuss said. “What will end up happening is most likely there will be some sort of détente. I can’t say definitively what that means.”