Even before the pandemic occurred, there was some concern last year that large, highly leveraged media giants were already treading dangerously in a volatile stock market. Last year, Netflix, with approximately $12 billion in debt, sold $2.2 billion of junk bonds to raise additional capital. This year, in a span of just days, Fox Corp., Comcast and ViacomCBS have cumulatively offered around $10 billion in debt to raise capital in response to COVID-19. Meanwhile, companies like Discovery have drawn on their revolvers to ensure they have sufficient cash on hand.
While many have alluded to parallels between today and the 2008 recession, the causes and impact of a present-day recession differ greatly. The 2008 recession was a result of a financial crisis that impacted corporate lending as a whole, resulting in tightening of lending standards and a more critical focus on creditworthiness of borrowers across all industries. In comparison, the measure of impact of any recession that may occur this year that may disproportionately affect the entertainment industry will largely depend on the length of time it will take (1) to flatten the curve and (2) for people to resume engaging in forms of entertainment that are currently prohibited in most jurisdictions, such as movie theaters, theme parks and live events.
While production loans may be delayed due to production shutdowns, producers can still focus on financing post-production, which can largely be accomplished during this time of social distancing, until new or halted production activity resumes. Entertainment companies looking to utilize general corporate facilities to finance their operations, development or productions should ensure that the definition of “material adverse effect” in their credit facilities carves out events that impact the entertainment industry as a whole. Lenders, on the other hand, should focus on ensuring borrowers can adequately comply with financial covenants, such as examining potential events that may affect liquidity and adding or tightening a new liquidity covenant, and consider instituting interest rate fluctuation protection given the lasting effects COVID-19 may have on the economy.
Lenders should also consider that entertainment financing will likely bounce back once the stay-at-home orders are lifted. According to a study by analytics company EDO, 70 percent of moviegoers indicated they were likely to return to theaters, although 45 percent would wait a few weeks, and 11 percent would wait several months. In addition, certain studios, including Netflix and HBO, are still paying cast members their talent fees, while other studios, including WarnerMedia and NBCUniversal, have set up funds for employees and production crews instead of conducting layoffs. These are promising signs that they intend to resume production as soon as possible and will need capital to do so. While residual fear of contracting COVID-19 may continue to impact revenues for some time, the recovery period may still be shorter compared with the effects of the 2008 recession, when players were dependent on recovery of the entire economy. For instance, after lending peaked in mid-2008, it declined rapidly through 2009 before resuming around 2011 at a much slower pace than in the early 2000s. Post-COVID-19, however, production lending will resume since it has no dependency on the economy as a whole.
In addition, with more than 90 percent of Americans subject to stay-at-home orders, alternative means of entertainment are still available. According to a recent Nielsen analysis, streaming has been up 85 percent for the first three weeks of March 2020, compared to the same three-week period in 2019. Meanwhile, traditional broadcasters are still able to depend on basic-cable reality television—in fact, some networks’ ratings have risen and even doubled. Looking forward, lenders and investors should take comfort in knowing that the entertainment industry, while constantly changing, will still be active.