• A banker talks about sustainable leverage

    Insider gave his thoughts on sustainable leverage for an out of home company yesterday.  He received this feedback from an out of home industry banker:

    I just read your article on sustainable leverage, which was quite accurate from the bankers perspective.  However, I doubt many banks have different underwriting guidelines for public outdoor companies and private outdoor companies.  In fact, we tend to like our private companies to have even lower leverage for operating flexibility and because they generally have less access to capital to fix a problem.

    An interesting twist, I believe, is that from a company’s perspective, they never plan on having $0 debt.  That is not a typical corporate financial goal.  In fact, I think a shareholder would feel management is not doing its job if they are not levered at least 2x.  So then, is “sustainable” actually a repayment to some level other than $0?  As bankers, however, we dutifully plug in a number for full principal repayment over 10 years, as you have indicated, to calculate a “normalized” fix charge coverage, which is anything but “normal”.”

    Insider’s take:  Insider doesn’t think we’ll ever see Lamar, Outfront or Clear Channel at $0 debt.  Even so, sustainable debt is the level of debt which you can repay, if you have to.  Why will lenders keep lending you money?  Because they think you can repay them if they ask you to.


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