- Group of bondholders have agreed to give new cash to company
- Investors will get back better-ranked bonds, higher interest
Getty Images Inc., the digital photography pioneer that’s been struggling for cash amid a price war with newer rivals, is getting a lifeline from investors known for profiting from distress.
For the investors, which according to people with knowledge of the matter include Archview Investment Group, D.E. Shaw Investments, MatlinPatterson Global Advisers and Silver Point Capital, the deal is proving a truism in distressed-debt investing: To make money, be prepared to spend a bunch of it first.
For Getty, it means a much-needed $100 million to help revive its so-called midstock business, which sells rights to images that are less expensive than exclusive stock photos such as Alfred Eisenstaedt’s iconic World War II kiss in Times Square.
The company, which is owned by the private-equity firm Carlyle Group LP, will use the cash partly to improve the technology that helps customers find the photos they want, said the people, who asked not to be identified because the information is private. Getty’s midstock business is under pressure from lower-cost competitors like Shutterstock Inc. and Adobe Systems Inc.’s Fotolia LLC, which provide images from amateur and semi-professional photographers to a growing number of Internet-based publishers.
“It’s very tough to get cash when the business is struggling,” said Erik Gordon, a law and business professor at the University of Michigan. “In that sense, Getty won by getting the cash it needs.”
The new money is part of a debt swap agreement between Getty and a group of bondholders that owns about 65 percent of the company’s $550 million in unsecured bonds, the people said. Investors including Archview, D.E. Shaw, MatlinPatterson and Silver Point agreed to provide the capital and swap about 43 percent of the unsecured bonds at a discount for higher-ranked debt, they said.
Under the terms, Getty will exchange its investors’ old bonds for new ones at a rate of 64 cents on the dollar, swapping about $235 million of old obligations paying 7 percent interest for new first-lien debt. The total face value of the new obligation will be $252.5 million and it will pay 10.5 percent, they said.
The investors demanded a 5 percent discount on the $100 million portion of the notes, meaning Getty will receive $95 million in cash, the people said. They are also getting a $2.5 million structuring fee.
“The bondholders are jumping up and down,” Gordon said. “They are getting more value on their debt and were bumped up in the capital structure.”
Equity vs. Debt
The investors taking the deal will be exchanging old obligations that traded at 30 cents before news of the swap deal for new ones that rank as high as debt trading at about 68 cents, according to data compiled by Bloomberg. Holders who bought the notes any time after Feb. 23, when the company disclosed it had burned through a third of its cash in the final quarter of 2014, would’ve paid no more than 63.3 cents, the data show.
Representatives for Carlyle, Archview, D.E. Shaw, MatlinPatterson and Silver Point declined to comment.
“The incremental liquidity is positive but the incremental debt and interest expense are negative,” said Geof Marshall, a portfolio manager at CI Investments Inc. whose firm owns some of Getty’s bonds. “I’m disappointed in the sponsor because growth capital is supposed to be equity.”
Marshall concurs with an assessment from Moody’s Investors Service that the new capital should be in the form of equity, not debt. The ratings firm on Wednesday downgraded the company one level to Caa1 from B3, saying it would need “more time than previously expected to improve credit metrics, including leverage and free cash flow.” The grade wasn’t initiated because of the new financing agreement, the ratings firm said.
“Although cash balances would increase initially by roughly $90 million post-transaction, planned funding of growth investments and higher debt service will leave the company with only adequate liquidity and limited ability to reduce debt balances over the next 18 months,” Moody’s said in its report.
Moody’s senior analyst Carl Salas said Thursday that while the new investment will help increase revenue and cut some expenses, the problem is that its success won’t be measurable for at least a year. Getty will use the cash in part to increase its marketing efforts and develop a consumer-facing business, Salas said.
Getty has been trying to shore up its balance sheet since August. The agreement requires approval from loan holders before it can be finalized, the people said.
The company said in a statement Tuesday in response to questions about the agreement that it is “pleased with the progress we are making in our capital raise process, as well as the delivery and momentum of another strong quarter’s results.”
Getty told holders of its nearly $2.5 billion of debt this week that a measure of its earnings improved in the quarter ended Sept. 30, people with knowledge of the matter said Tuesday. Its earnings before interest, taxes, depreciation and amortization were $69.6 million, about 1 percent higher than last year.
The company took in about $202 million of revenue, adjusted for currency fluctuations. That was flat compared with a year ago.
Revenue from the midstock division fell but the pace of the decline slowed from the previous two quarters. The unit posted sales of about $50 million in the period, which was 8 percent less than the prior year. Revenue had declined by 10 percent and 15 percent in the previous two quarters compared with a year earlier.
Getty roughly doubled its cash from June, ending the third quarter with approximately $39 million on hand.
“They got lucky this round,” John Harrington, publisher of Photo Business News, said Wednesday. “It’ll help them stay around a little longer but I don’t see it as such a game-changer that it’s going to turn the company around.”