W“Working with your lender” is a phrase whose meaning isin the eyes of the beholder. For a consumer, it may meancalling the credit card company after a job loss. For afarmer, it means talking with the bank at the beginningand end of each growing season. For a manufacturingbusiness, it means keeping the lender apprised of invento-ry levels and sales.

For broadcasters, “working with your lender” meanssomething more. A broadcaster’s relationship with its lenderis a dialogue that begins before the first term sheet andcontinues until the loan is paid in full. While some aspects ofthe relationship are like other commercial loan relationships,no other industry shares all of the challenges that broadcast-ers pose for lenders: Broadcasters have no inventory, andeven their equipment typically has too little value to supporttheir lending needs. Their individual receivables are oftentoo small to warrant significant collection efforts following

foreclosure. Most importantly, under existing FederalCommunications Commission regulations and case law,their most valuable asset, the FCC license, can’t be subject-ed to a lender’s security interest.

Because broadcasters are unique, they need to findlenders who have knowledge of their industry and can with-stand the ups and downs of the broadcasting industry. Withthat in mind, we offer the following tips on working withlenders.

1. Learn the differences among lenders. There aremany ways to categorize commercial lenders:

Asset-based lenders vs. cash-flow lenders: Finance compa-nies and other asset-based lenders typically expect to berepaid from cash flow, but they count on selling the bor-rower’s assets to pay the debt if the cash flow is inadequate.Asset-based lenders are usually a poor fit for broadcasters,

FINANCE

Few industrieschallenge

lenders likebroadcasting.Here’s how tomake the most

of a trickyrelationship.

By Jim Pfau and ErwinKrasnow

BorrowerBEWARE

Reprinted from the May/June 2006 issue ofThe Financial Manager magazine

most of whose value is typically tied up in the FCC license.In contrast, cash-flow lenders will be focused on the value ofyour business as a going concern. Even if they take collater-al, the most realistic broadcast lenders recognize that thecollateral serves primarily as leverage, not as a direct sourceof repayment.

Holders vs. sellers: The secondary mortgage market – inwhich mortgage loan originators sell their loans to FannieMae or others – has existed for decades. More recently,commercial loans have been packaged and resold to largeconsortia of investors, whether through securitizations orspecific participations. Obtaining a waiver or amendmentfrom a single lender can be straightforward. Obtaining awaiver or amendment from a handful of lenders can be a lit-tle more difficult. Obtaining a waiver or amendment from alarge number of lenders – or from a trustee acting on behalfof investors – can be almost impossible. Given a choice, andassuming identical financial terms, you will generally find lifeeasier when working with a single lender (and a singlelender’s credit review process) than with a lender that sellsits loans and retains only the servicing rights.

Number-crunchers vs. character lenders: This distinctionis a bit misleading since all lenders these days mustcrunch numbers, and we hope that all lenders pay at leastsome attention to character. Still, lenders fall at differentpoints along the spectrum. If you get into trouble, you’drather be working with a lender who has confidence inyour character (unless, of course, your own characterwon’t win you any points).

2. Ask questions. Some broadcasters don’t havethe luxury of choosing among lenders, and some willmake a choice based solely on pricing. If you have achoice among lenders with similar terms, ask somebasic questions that may make a difference when youhit a rough spot:

Does your banker understand broadcasting? As notedabove, broadcast lending is unique. A community bankerused to lending against inventory and equipment may getskittish when the broadcasting industry experiences a down-turn. An experienced broadcasting lender will be more likelyto understand your place in the industry-wide cycles thatinevitably occur.

Who will be managing your loan in two years?Financial institutions, and even departments within financialinstitutions, turn over their personnel at different rates. Ifthe loan officer who closes your loan is likely to move upthe corporate ladder in 18 months, you’ll be dealing withan unknown quantity during the life of your loan. If you areconcerned about loan officer churn (and maybe even if youaren’t) it’s a good idea to talk with other lenders in thebank’s media finance department, including the departmentmanager. Departments develop their own personalities.Talking to other lenders in the department may give you anidea whether your banker is typical or an aberration – andlet you know who you might be facing in two years whenyou need a waiver.

Who will represent the lender?For the initial negotiation and closing,at least, your lender’s attorney canmake your life hellish or smooth theroad to a good lending relationship.Find out the name of the individuallawyers or law firm your lender willengage, and ask others in the industryabout their experience with thatlawyer. You may save yourself initialheadaches and a rocky start.

3. Read the loan documents.It seems obvious, but don’t leave thedocuments entirely to the bankers andlawyers. Even the best lawyer won’tknow enough about your business totell you whether the loan documentsmatch your needs. If you tire of the“legalese” or have a short attentionspan, focus your reading on some keyprovisions:

The borrowing mechanics: If theloan documents require three days’written notice for an advance but youwant to borrow on a same-day basis,the document won’t work for you.

Financial covenants and relateddefinitions: Your lender will probablymeasure your performance primarily bycompliance with the financialcovenants. Make sure that you under-stand those covenants and that theymake sense for your business. Forexample, ratios based on tangible networth seldom should be applied tobroadcasters, but lenders unfamiliarwith broadcasting may include themout of habit. You may also find surpris-es in the definitions. Perhaps a defini-tion of “broadcast cash flow” (or“operating cash flow” or “EBITDA”)doesn’t include all of your expectedaddbacks.

Restrictive (or negative)covenants: Look carefully at covenantsrestricting your indebtedness, liens, div-idends and the like. If your business isincorporated as a subchapter S corpo-ration or a limited liability company,are you allowed to make distributionsfor your owners’ tax payments? Doesthe indebtedness covenant permit youto buy copiers, vans and the like withpurchase-money financing (includingcapitalized leases)? Do you have theright to move funds among relatedcompanies in accordance with yourusual practices?

Don’t be bashful in providing com-ments to your loan officer. It’s a nearcertainty that your lender (and maybeeven your lender’s lawyer) didn’t actu-ally think about every single point inthe first draft. A good lender will wel-come the opportunity to refine theloan documents to match the parties’actual intentions.

4. Keep your lender informed.Most of us know what it’s like todelay bad news, hoping that Momwon’t learn about the failing grade,or Dad somehow won’t find the bro-ken garage window. A surprisingnumber of borrowers exhibit thesame behavior.

Our advice: Face up to the factsand let your banker know. As thejournalist Earl Wilson once wrote,“Snow and adolescence are the onlyproblems that disappear if you ignorethem long enough.” For broadcasters,this means:

Deliver your financial statementson time. Delaying your financialreporting may convince the bankerthat you’re a risky credit and untrust-worthy. It’s better just to be a riskycredit.

Call (don’t e-mail) the lender withadvance notice of bad news. Yourlender doesn’t want to find out aboutyour problems when you deliver youraudit 120 days after year-end. Place acall to the lender as soon as you recog-nize that your covenants are going tobe breached. This will demonstrateyour good faith to the lender. Somelenders will also find it easier to obtaininternal approval for an amendment orconsent (loosening the covenants) thanfor a waiver of a default after the fact.

Avoid accounting gimmicks.Maybe you can reverse some chargesto appear in compliance with the loandocuments, or maybe you can make aclever argument that the definitionsdon’t mean what the parties reallyintended. We recommend resisting thattemptation unless you have no intentto continue working with this lender.When a lender feels that you have vio-lated the spirit of the loan documentsbut wriggled out of the defaultthrough clever legal work or account-ing, the well has been poisoned, andyou will probably find the lender quick-

er to scream “default” in the futurewhen you breach the loan documents.

5. When all else fails, considerasking for a different loan officer.Sometimes two personalities justdon’t mix. The lender who was ineager sales mode before closing hasturned hostile, or perhaps has beenreplaced by his or her evil twin.Consider having a meeting with thelender’s department head to askwhether you can have a different loanofficer. Use this approach sparingly,though: You may get a reputation asa troublemaker – and the departmenthead may say “no,” leaving you withthe same loan officer but in a lessfriendly mood.

For a borrower, the ultimate correc-tion for a failed lending relationship isreplacement of the lender. Like eutha-nizing the miscreant pet, though, thisshould never be a preferred option. Inmany cases, the borrower will simplytrade one set of problems for another,and each new lender is likely to chargea new set of origination, documentpreparation and legal fees. By followingthe advice in this article, we hope thatyou’ll be able to build a relationshipthat lets you continue with your lenderthrough many long and mutually prof-itable years.

Jim Pfau is a part-ner in the Financeand RestructuringGroup at Faegre &

Benson LLP inMinneapolis. He

has worked exten-sively with broad-

cast and otherlenders on secured

and unsecuredloans to broadcasters and other borrowers.

Erwin Krasnow is apartner and chairsthe Communica-tions and Infor-

mation TechnologyGroup at GarveySchubert Barer inWashington D.C.

He also servesas Washington

counsel to BCFMand is the founding director and vice chair ofBroadcast Capital Inc., a minority broadcast

investment fund.