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Would Tory TV bailout hasten Canwest collapse?

The Harper government is considering the creation of a $150 million fund to prop up local television stations across Canada. News of the broadcast bailout surfaced after national networks Canwest Global and CTV indicated they might switch off money-losing stations in smaller markets such as Kelowna.

But a recent Globe and Mail dispatch on the thorny nature of Canwest’s debt prompts the question: Would a Tory TV bailout hasten Canwest’s collapse?

Canwest Global Communications Corp. owes $4.1 billion to banks and bondholders. Company executives repeatedly refused to comment on negotiations with lenders, but financial writers have framed Canwest’s line to its lenders as something like this: Toss us into bankruptcy now and you’ll lose billions; Dance with us a little longer and things might improve.

Reporter Boyd Erman described the situation this way in a post on the Globe and Mail's Streetwise blog:

"Canwest is almost like a landlord with a rental house that's fallen so much in value that selling it wouldn't cover what's left on the mortgage. Better to hold on to the assets and collect what rent you can to cover interest payments and hope that the market recovers, because selling would leave you still with a big chunk of debt and no income at all to cover the interest."

Erman’s post, entitled 'Canwest’s Math Problem,' reported:

"Canwest has basically abandoned serious attempts to sell assets, sources said. While there are interested buyers, there are two main problems: The prices are nowhere near enough to cover the debts tied to the assets, and Canwest's corporate structure makes it almost impossible to make sales work.

"Take the company's newspapers. With the exception of the National Post, the papers are held in a separate company under the Canwest umbrella, so any funds raised by asset sales would have to go to pay down debt in that holding company. But the sale would reduce earnings at the parent company, which would push it closer to a debt covenant that's already too close for comfort. So while there have been approaches, Canwest can't pull the trigger on sales of individual newspapers or small groups of titles.

"As for broadcasting assets, the debt tied to those is around five times earnings before interest, taxes, depreciation and amortization (better known as Ebitda for short). So unless someone is willing to pay five times Ebitda for the assets, there's not much point in selling. And nobody is paying five times in current markets."

If Erman’s assessment is correct, then one might reasonably wonder whether a Tory TV bailout would become a tipping point in what looks like an ongoing game of chicken between Canwest and its lenders.

Right now, those banks and bondholders are looking at a company with two upside-down businesses (newspapers and broadcast television) and one moneymaker (Canwest’s specialty cable channels). That's a house they've declined to repossess, at least thus far. But, if Harper were to pump $150 million into local television, those lenders might see two moneymakers.

If that looks like a house worth taking, the bondholders would force Canwest into bankruptcy, recoup part of their capital quickly by brokering a sale of the cable channels, and recoup the rest slowly by operating the Canadian television businesses until a fee-for-carriage law is passed, or broadcast advertising picks up, or both.

It’s not as if there’s no precedent for the law of unintended consequence overruling the hopes of politicans. Just look at what happened when the US started bailing out banks.

Monte Paulsen reports for The

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