Endemol Fights To Stave Off Loan Covenant Breach

LONDON (Reuters) – Indebted Dutch reality television producer Endemol is fighting to stave off a loan covenant breach and a wider debt restructuring as it struggles to manage its 2.3 billion euro ($3.20 billion) debt, investors said on Tuesday.

Three investors in Endemol’s leveraged loan — GoldenTree, Sankaty and Centerbridge — queried the company’s use of profits from loan buybacks to pad out its earnings and keep it within its loan covenants.

Endemol, make of the popular Big Brother reality TV show, added 81.1 million euros of loan buybacks gains which boosted Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) to 181.9 million euros, investors said.

“You can’t manipulate EBITDA using one-off gains,” a leading investor said.

The three investors asked agent bank Barclays to get Endemol to stop the controversial practise last week and said that they would go to court if the company did not.

Endemol has been unwilling to agree as it will breach covenants without the gains from buyback and possibly have to enter a debt restructuring, investors said.

Endemol is set to lose the revenue from Big Brother from September 2010 and has unsustainably high leverage levels of around 13 times earnings on its debt, they added.

Endemol could not immediately be reached for comment.

Agreeing to stop the practice could also put Endemol’s shareholders in a difficult position, sources said.

Endemol is owned by Mediaset Group, (MS.MI), the media company owned by Italian Prime Minister Silvio Berlusconi, Endemol founder John de Mol’s investment vehicle Cyrte Group and Goldman Sachs’ Capital Partners. Mediaset is publicly listed and could have to restate its accounts, the leading investor said.

The shareholders contributed equity of around 2 billion euros to the company’s buyout in May 2007, which could be wiped out in a debt restructuring, he added.

“There is just too much debt and something needs to happen,” a second investor said.


Endemol’s lenders held a call on Tuesday to discuss possible solutions before a lender vote on Wednesday at 1700 GMT.

The investor group offered a compromise to allow Endemol to keep the gains of previous buy backs, provided that it stopped taking the gains going forward.

Goldman Sachs launched a counterproposal on Tuesday that would allow Endemol to complete a last buyback with gains of 30 million euros that would keep Endemol within its loan covenants until the first quarter of 2011, investors said.

“Endemol is asking for a one-off to get around the loan covenants, this should be a covenant reset,” the investor said.

Endemol’s shareholders borrowed 2.2 billion euros to finance the 2.639 billion euro purchase of Telefonica’s 75 percent stake of the company in May 2007.

The loan was caught in the credit crunch and was sold at a discount of around 70 percent of face value in June 2008 to a mix of hedge fund and private equity buyers.

Despite a massive 30-point rally in the secondary loan market in 2009, Endemol’s loan is still trading around that level at 72.5-75 percent of face value, according to TRLPC data.

Endemol is one of Goldman Sachs’ biggest investments, sources said. The firm made an initial equity investment and arranged the company’s loan but added to its position by buying discounted debt in the secondary loan trading market.

Goldman now owns around 83 percent of Endemol’s mezzanine debt, two thirds of the second lien and around 18 percent of the company’s first lien debt, sources said.

GoldenTree, Sankaty and Centerbridge own around 20 percent of Endemol’s senior debt.

After the loan buybacks, Endemol owns 6 percent of its 2.3 billion euro debt — around 138 million euros — which carries voting rights, and is intending to vote on the proposals, sources said. (Reporting by Tessa Walsh)