Source: Globe and Mail

Fears that CanWest Global Communications will hit the wall are growing, as the media company begins what one analyst dubbed a "debt juggle," borrowing from its operating units to appease lenders to the parent company.

CanWest released weaker-than-expected quarterly results on Wednesday, and told investors it was in danger of breaching loan covenants later this year, after renegotiating new terms just three months ago.

As bad as that seems, a closer look at the numbers reveals breathtakingly unsustainable borrowing.

When analyst Ben Mogil at Thomas Weisel Partners broke down CanWest's all-important EBITDA – the earnings before interest, taxes, depreciation and amortization that lenders track – he found "that EBITDA for covenant purposes was stable from fiscal 2008 to the first quarter of 2009 was largely a result of borrowings to fund a dividend at its newspaper limited partnership."

In telling clients he was cutting his earnings forecast and price target for CanWest, Mr. Mogil titled his report "The Debt Juggle Begins."

When it comes to the overall wisdom of increasing borrowing at the operational level to maintain EBITDA at the parent, Mr. Mogil said: "Clearly this is not a long-term solution to CanWest Media's covenant issues and we cannot imagine that this can continue for the remainder of the year."

"As the CanWest Media 8% notes trade at under 50 cents on the dollar, financial restructuring cannot be ruled out in this environment," said Mr. Mogil, repeating a warning previously voiced by a number of other analysts.

Here's how the cash is moving around within CanWest: The company is pushing up against covenants that require $190-million in EBITDA at the parent company level. The EBITDA number for this covenant was $226-million through the first quarter. That looks like a substantial cushion.  But as Mr. Mogil noted, "Alas, looks can be deceiving."

A lousy advertising market meant EBITDA at CanWest's newspaper unit fell by $30-million in the first quarter, year-over-year. Yet as Mr. Mogil noted,  "the newspaper limited partnership borrowed $20-million in the quarter to cover dividend payments."

Without this borrowing, there's not much of a cushion between the EBITDA CanWest's lenders need, and what the parent company is receiving from the operation units. Again, over to Mr. Mogil: "It would not be a stretch at all to imagine another $30-million of newspaper EBITDA decline over the remaining three quarters."

Hence the company's warning Wednesday on a potential breach of covenants.

All of this begs the question of what CanWest will do next. Chief executive officer Leonard Asper can resort to some combination of asset sales and more liberal covenants from lenders. When it comes to selling media properties, there are a number of foreign units that could be moved, and Mr. Asper said Wednesday: "Everything in our entire portfolio is getting a good look over."

However, Mr. Mogil said "that assets such as Turkey or the French language specialty channels continue to be part of the portfolio appears to us be a resistance to sell non-core assets."

CanWest stock dropped 35 per cent yesterday, to 58 cents a share, as the company announced quarterly results and warned of covenant breaches. CanWest's equity is now worth $92-million, while it carries $3.6-billion of debt.

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