FriendFinder in Deadline as Sex Doesn’t Sell: Corporate Finance

FriendFinder Networks Inc. (FFN), 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.”

To contact the reporter on this story: Zeke Faux in New York at zfaux@bloomberg.net

To contact the editor responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net

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