Restructuring in the Wake of Recession

One result of an especially deep or prolonged economic slump will be the radical restructuring in many industries. Right now, we're only getting a hint about it from the stock price action. A number of stocks have fallen to decade lows on fears that debt loads will prove too daunting in an environment of negative revenue growth. In coming quarters, bankruptcy filings may start to pile up.

Debtholders will likely take control of a wide range of companies in 2009, and in the process, a number of these holdings will likely re-emerge as shadows of their former selves. Bondholders will look to shrink the businesses, or may look to pair up companies to rebuild critical mass before taking them public anew early next decade.

A look at the radio industry is instructive. Citadel Broadcasting (CDL - commentary - Cramer's Take), Westwood One (WWON - commentary - Cramer's Take), Entercom (ETM - commentary - Cramer's Take), Emmis Communications (EMMS - commentary - Cramer's Take), Radio One (ROIAK - commentary - Cramer's Take) and Sirius XM (SIRI - commentary - Cramer's Take) have all seen their stocks fall below $1. And in every case, bankruptcy looms as a distinct possibility in 2009.

The radio stations are just one example of an industry that never anticipated a major slowdown, and borrowed liberally. The major players are shedding employees every quarter and will need to keep doing so over coming quarters as well. That won't forestall the bankers from taking the reins when the financial vise gets too tight.

Make no mistake, these radio companies generate positive operating cash flow -- just not enough to make debt payments or stay within agreed-on financial covenants. So when bondholders assume control, they can keep the companies running but business plans will need to be altered. For example, radio networks with minimal geographic overlap might be brought together, and local on-air talent could be increasingly replaced by cost-saving national programming (think 50 minutes of national blather and 10 minutes of sports, weather and traffic every hour).

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David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.