Corus Entertainment Inc. has another six weeks to solve its debt crisis.
Toronto-based Corus, which owns Global News as well as dozens of television and radio stations across Canada, originally had until Sept. 1 to negotiate some form of debt relief with its lenders. But on Tuesday the company announced it has received an extension from its bank group, which is led by Royal Bank of Canada and Toronto-Dominion Bank, through Oct. 15.
The extension will allow Corus to carry more debt relative to its income. Under its previous debt agreement, it would have seen its debt-to-EBITDA ratio drop to a maximum of 4.25 as of Sept. 1, meaning total debt could not exceed 4.25 times its annual operating income, which the company has previously acknowledged it was on course to exceed.
Corus was previously allowed to carry as much as 4.5 times its operating income in debt. The extension agreement allows for a ratio of up to 4.75 until mid-October.
However, the updated terms also require any excess cash Corus may receive to go toward debt repayment.
Most of the company’s more than $1-billion in debt is due for repayment within the next few years. Corus has $290-million in bank debt set to reach maturity in 2027 and $500-million in bonds due the following year.
It has been aggressively cutting costs – including more than 800 jobs, 25 per cent of its work force – and in July warned its debt issues “may cast significant doubt about the company’s ability to continue as a going concern.”
The company’s debt crisis dates back the better part of a decade, to early 2016, when Corus agreed to acquire Shaw Media Inc. for $2.65-billion. That was how the company came to acquire its most lucrative assets – including the Global TV network and more than a dozen specialty cable channels such as Food Network Canada and HGTV Canada – but the deal was funded entirely with borrowed money.
Corus raised $2.3-billion in senior secured credit and a $300-million revolving credit facility at the time, which put its lenders first in line for repayment ahead of shareholders.
All that new debt immediately raised red flags. In a Feb. 19, 2016, report, Institutional Shareholder Services warned Corus was taking on “a substantially greater” amount of debt than it has maintained in the past, pushing its overall debt-to-earnings ratio beyond its target range.
The deal also faced criticism over the Shaw family’s perceived conflict of interest. Because they controlled Shaw Media and also held roughly 86-per-cent voting control of Corus – a position they maintain to this day – one dissident Corus shareholder said the billionaire Alberta family was essentially selling assets to itself at an inflated price, paying with debt and pocketing the proceeds.
Catalyst Capital Group Inc. claimed Corus was overpaying by roughly half a billion dollars for Shaw Media and that the Shaw family personally stood to gain between $50-million and $63-million from the transaction. Catalyst tried to convince regulators to delay a shareholder vote on the deal, but the private equity investment firms’ entreaties were rejected by the Ontario Securities Commission, and shareholders blessed the deal.
At that point, by the end of April, 2016, Corus shares were worth roughly $12 each, giving the company a total market value of roughly $2.3-billion. Put another way, Corus owed more to its lenders than investors thought it was worth.
The company made some progress paying off its bank loans, getting total debt outstanding below $2-billion by the end of 2018 and below $1.4-billion by the end of 2021. By the end of last year, Corus had replaced most of its bank debt with corporate bonds, which ended up creating new problems.
It had promised bondholders it would maintain a maximum debt-to-EBITDA ratio, meaning total debt could not exceed a certain multiple of its annual operating income, and that ratio would fall over time.
Starting Sept. 1, its maximum debt-to-EBITDA ratio was due to fall to 4.25 from 4.5, meaning total debt could not exceed 4.25 times its annual operating income. In a July 15 note to clients, TD Cowen analysts Vince Valentini and Natale Puccia said the company’s debt-to-EBITDA ratio was likely to exceed 6.0 by the end of its 2025 fiscal year.
The straw that ultimately broke the camel’s back landed in June, when the company was informed that Warner Bros. Discovery Inc. would not renew Corus’s Canadian rights to five popular specialty channels, including HGTV and Food Network, when its current deal expires at the end of this year. Corus rival Rogers Communications Inc. said it had won the rights to that content starting in 2025.
Corus has complained to the Canadian Radio-television and Telecommunications Commission that Rogers has “weaponized” its dominant position to unfairly disadvantage Corus and other independents. In response, a Rogers spokesperson told The Globe and Mail last month that Corus was “looking for the regulator to protect their broken business model.”