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"FriendFinder in Deadline as Sex Doesn?t Sell: Corporate Finance
2012-08-30 19:09:41.848 GMT
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By Zeke Faux
Aug. 30 (Bloomberg) -- FriendFinder Networks Inc., the
owner of Penthouse magazine and a sex-dating website that has
$511 million of debt, was given three months by its bondholders
to turn around a business that has never reported a profit.
FriendFinder?s $280.5 million of second-lien notes due 2014
plunged 28 percent this month to 12.5 cents on the dollar, the
second lowest among the 2,063 bonds in the Bank of America
Merrill Lynch U.S. High Yield Master II Index. Bondholders have
given the company until Nov. 14 to raise its cash balance, Chief
Financial Officer Ezra Shashoua said on an Aug. 14 conference
call with investors.
?They?re probably going to have to go back to lenders and
see if lenders are willing to change the terms of the debt,?
said Standard & Poor?s analyst Daniel Haines in a telephone
interview. He downgraded the Boca Raton, Florida-based company
to CCC on Aug. 22 in a report, saying it ?could prove
difficult? to refinance the debt.
Anthony Previte, who took over as chief executive officer
in July, is trying to cut costs and sell more subscriptions to
people looking to meet for sex after the former chief Marc
Bell?s push into online coupons failed. With just $12.8 million
of cash as of June 30 and no profit since at least 2006, the
company is struggling to generate enough money to pay off its
obligations when they come due and to bring earnings in line
with terms laid out in its debt agreement.
In Compliance
FriendFinder was either in compliance or had waivers for
all of its debt covenants as of June 30, Shashoua said today in
a telephone interview.
The second-lien noteholders agreed this month to delay
until November a rule that the company hold $10 million of cash,
which FriendFinder had violated earlier, according to an Aug. 14
regulatory filing. Holders of those securities can?t demand to
be paid before other investors.
?You have different options to get your cash reserves
above $10 million,? Shashoua said.
FriendFinder?s $213 million of first-lien notes due
September 2013 dropped to 71.5 cents on the dollar on Aug. 1,
from as high as 89 cents in March, according to Trace, the bond-
price reporting system of the Financial Industry Regulatory
Authority. The securities jumped to 78.5 cents at 11 a.m. today.
Since FriendFinder raised $50 million in its initial public
offering in May 2011, its stock has plunged 93 percent to 68
cents at 2:55 p.m. today in New York.
Shut Out
Marsico Holdings LLC?s $603 million of 10.625 percent
subordinated bonds due January 2020 are the only securities that
trade cheaper than the FriendFinder second-lien notes in the
Bank of America Merrill Lynch?s high-yield index.
?Generally, when a company?s existing bonds trade at a
very low price, normally they?re shut out of the capital markets
and have to restructure,? said Jeff Peskind, founder of Phoenix
Investment Adviser LLC in New York, which manages $500 million,
including distressed debt. Peskind said he doesn?t follow
FriendFinder.
?There?s nothing going on at this point,? Bell, who?s now
co-chairman of the board and chief strategy officer, said in a
telephone interview. The bonds ?don?t come due soon,? he said.
Previte said on the Aug. 14 conference call with analysts
to discuss earnings that he?s working with bondholders on a
refinancing that ?makes sense to everyone.?
Earnings Requirement
Bondholders agreed in March to modify the terms of the
first- and second-lien debt to require $80 million of earnings
before interest, taxes, depreciation and amortization, or
Ebitda, in the year ending June 30, 2013.
FriendFinder?s Ebitda fell 19 percent to $88.3 million in
2011, Bloomberg data show, and is currently at $70 million for
the last 12 months. Its ratio of debt to Ebitda, adjusted for
leases, was ?very high? at 7.4 times as of June 30, according
to S&P.
FriendFinder?s CCC rating means it?s ?currently
vulnerable? to nonpayment, according to S&P.
Andrew Conru, one of the founders of AdultFriendFinder.com,
is the company?s biggest creditor, with about $243 million of
bonds, according to a Dec. 16 filing. Asked whether he would
consider converting some of his second-lien notes to equity to
lessen the company?s debt burden, Conru said he is ?currently
investigating all options.?
?Everything depends on the terms,? he said in an e-mail.
Hedge Funds
Hedge funds Del Mar Master Fund Ltd., Rockview Short Alpha
Fund Ltd., Stonehill Master Fund Ltd., Visium Credit Master Fund
Ltd., Hayman Capital Master Fund LP and Zell Credit
Opportunities Master Fund LP also hold bonds, the Dec. 16 filing
shows.
AdultFriendFinder.com, which helps people meet for sex,
accounts for about 65 percent of the company?s revenue, S&P?s
Haines wrote in the Aug. 22 report. The firm lost $31.1 million
last year and reported interest expense of $86 million,
eclipsing its $64.7 million of operating income.
?It?s sort of like a Facebook but for people who are
trying to find adult partners,? Haines said. ?They also have
live video chat. You would be paying the performer by the minute
and then they?d be doing whatever they do.?
One of Bell?s failed ventures was a transaction in
September 2011 to buy an international daily-deals business
called JigoCity. FriendFinder lost about $11.5 million on
JigoCity this year, then sold the firm back to its previous
owner for $1 on August 1, according to the Aug. 14 regulatory
filing.
Bell Purchase
?We were trying to find things that meshed within our
business,? Bell said. ?We have a very big global reach.?
FriendFinder?s corporate structure was created in 2007,
when Bell and Daniel Staton struck a deal with Conru to buy his
company for $401 million, according to the filing. Conru took
the bulk of the price in bonds, the filing shows.
The buyer was a firm Bell and Staton had formed four years
earlier to purchase Penthouse out of bankruptcy. Staton owns
20.5 percent of FriendFinder, while Bell holds 16.5 percent,
Bloomberg data show.
On March 29, two days after bondholders agreed to loosen
terms, FriendFinder said in a statement that Bell, who co-chairs
the board of directors with Staton, would be replaced by Previte
as CEO. Bell said the change wasn?t related to the debt
amendment.
?I was contemplating a run for Congress,? said Bell, who
told the Palm Beach Post about his plans in a March 8 article.
?After talking with my family, I decided it was not the right
time.?
For Related News and Information:
Peer comparison: FFN US <Equity> PPC <GO>
Relative value: FFN US <Equity> RV <GO>
Corporate finance columns: NI CF <GO>
--Editors: Richard Bravo, Shannon D. Harrington
To contact the reporter on this story:
Zeke Faux in New York at +1-212-617-2267 or
[email protected]
To contact the editor responsible for this story:
Shannon D. Harrington at +1-212-617-8558 or
[email protected]"