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Cable Channel Parent Puts Focus on Debt Deals

Editor’s Note: This is a corrected version of the article which appeared in the June 27 print edition.

Two debt deals announced last week by the parent company of Hallmark Channel were designed to lower interest payments and stabilize the financial future of the cable TV company.

Crown Media Holdings Inc. in Studio City turned a profit in 2010 for the first time since it began publicly reporting finances in 1997. Since 2008, it would have been profitable except for large interest payments.

The stock has lost about 23 percent of its value in the last three months, hitting a 52-week low of $1.63 on the day the debt deals were announced.

The debt offering announced last week consists of two parts: $300 million in senior notes to institutional investors, and negotiation of a new secured credit facility.

Mindy Tucker, a spokeswoman for Crown Media, said that between both components, the company hopes to raise enough to pay off the $515 million it owes Hallmark Cards Inc.

“The purpose of this transaction is to have the company access public markets in order to lower borrowing rates and extend maturity dates to increase the financial stability of the company,” Tucker said. “It will lower debt payments immediately.”

Crown first launched a recapitalization plan last summer. Its main lender was a subsidiary of Hallmark Cards of Kansas City, Mo., that held $1.1 billion in Crown Media debt, representing accumulated losses by the channel since the subsidiary bought a stake in 2001. The recapitalization was an equity-for-debt swap that trimmed the indebtedness to Hallmark to about $515 million, but gave Hallmark more than 90 percent of the common stock. Before the recapitalization, Hallmark owned about 67 percent of shares.

Tucker said the Hallmark debt carries interest rates between 9 percent and 11.5 percent, but those numbers are scheduled to increase before the end of the year, raising the average interest to 15 percent.

Lloyd Greif, chief executive at investment bank Greif & Co. in downtown Los Angeles, said the looming bump in interest rates explains the timing of the debt offering.

He said the new debt will carry a rate in the 10 percent range.

“Wall Street doesn’t have a high value on the company,” he said, noting that Standard & Poor’s gives the debt offering a “B-” rating. “It’s a low-rated issue and that increases the cost of capital.”

Crown Media’s annual report attributed its first year of profitability to a general rebound in cable TV advertising and lower internal costs. The lower costs were due to the recapitalization last year, which lowered the company’s interest payments.

Fewer viewers

In 2009, Crown Media put itself up for sale, but no buyer emerged. Independent analysts attributed the lack of interest to the company’s debt load.

Last year, the channel entered into a programming partnership with Martha Stewart Living Omnimedia. The idea was to augment the channel’s original movies during primetime with a unified block of cooking, self-help and talk shows during the day. The four-hour weekday lineup was anchored by “The Martha Stewart Show.”

Rich Hanley, assistant professor of communications at Quinnipiac University in Hamden, Conn., and an expert on cable TV, said the Martha Stewart strategy didn’t get the desired results.

“Hallmark Channel ratings are declining across the board and in particular for its key demographic, women ages 25 to 54,” Hanley said. “Crown Media faces an uphill battle.”

Hanley said the competition for women TV viewers is ferocious, and with the launch of the Oprah Winfrey Network, NBC’s new women-friendly lineup and ABC’s upcoming Katie Couric talk show, he wouldn’t be surprised to see Hallmark Channel’s numbers drop further.

“Right now a lot of people are trying for the women’s demographic, but there are only so many eyeballs,” he said.

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