Sinclair buys Fox Sports regional networks

Private equity strikes again.

They took yet another business that would be a cash cow in any normal world. ... but zero interest rate policy made it ripe for financialization. With each changing of hands, it got loaded up with more debt to make a series of sales possible. Now it is drowning in $8 billion of debt that relied on interest rates remaining at almost zero interest forever so they could keep rolling the debt over. But interest rates are rising and that debt is severely distressed and default is looming.

Unless that changes, Sinclair will be the one left holding the bag.

What is so frustrating about it is that it's not like this is an unviable business. Once someone eats all of that debt, it will emerge on the other side as a cash cow, with the leagues (if they are the buyers) being the beneficiaries. And that will likely mean that it will end up costing fans.

 

This is what private equity has been doing since the financial crisis. ... and if the Fed keeps raising rates, people are going to become intimate with what was going on, the same way they learned about credit default swaps on mortgages in 2008. This time, the malinvest permeates way more things. ... but it is particularly ugly in corporate leveraged loans, which have been the domain of private equity.

The simplistic script:

1) You find a healthy business, one that isn't growing that fast, but which has a real business with real revenue and income. A lot of it has been in manufacturing, but something like these regional sports networks was prime for it, because they are great businesses.

2) Artificially low borrowing rates incentive private equity firms to borrow heavily to buy those businesses. They leave the debt on the balance sheet of the company, saddling it with debt. And then try to flip the company within five years by making it more profitable (which entails cutting costs aggressively).

3) They sell the business for a healthy profit, and in many cases, these are businesses that have been flipped muliple times this way, with each step of the way leaving the business with more debt.

4) Because savers are being robbed of safe yield, the artificially suppressed interest rates push pension funds, insurance companies and pretty much everyone else into riskier and riskier investments, and that has sent the leveraged-loan market soaring. That is where the loans to these businesses have been being repackaged, much the way that mortgages were being repackaged the last time around.

5) It's all great. ... as long as these businesses are able to keep rolling the loans over when they come due (unlike a mortgage, when your corporate loan comes due, you either need to repay all of the principle at once or roll it over into a new loan). With interests rates having been artificially pinned near zero for hte last 13 years, that has been no problem. For the most part, these businesses have been struggling under the weight of their debt, but they are able to make their interest payments because they are so low and when the loans were due, they were able to refinance with loans that have had very few covenants (so no lender protection, another consequence of the rate manipulation that has forced people into riskier behavior).

6) The problem now? Rates are rising. And there is rot waiting to be exposed. In the case of these RSNs, Diamond Sports Group (the subsidiary of Sinclair that owns these RSNs) has $8 billion in debt from the sale from ESPN. And rising rates have created a crisis. They already took a write down of several billion dollars when the pandemic shut down the sports leagues and they weren't earning. ... now they can not just roll over their loans with very little interest due. And they can't afford the borrowing costs now. They are going to drown in their debt. That is why the business is going to sell for way less than what they paid for it. They are getting stuck holding the bag. It was going to happen at some point. Unless the Fed pivots and rates come back down to zero, that $8 billion in debt is an albatross, and with anything above ZIRP (zero interest rate policy), it is untenable. I suspect the world is close to finding out just how much of this there is out there. At some point, it is a certainty.

 

It's not an issue with capitalism. You can't have free-market capitalism, when the most important price in an economy-- the price of money -- is being administered by an appointed czar who is powered by a government-enforced monopoly. Interest rates are prices. When that price is subject to price controls instead of being arrived at via price discovery in a free market, the distortions those price controls create (like overly indebted companies on the back of the mispriced debt) are not an issue with capitalism.

 

Free-market capitalism is the one economic system that keeps the state out of private economic activity.

It's beyond absurd to say that a "basic characteristic" of capitalism. ... is some corrupt perversion of capitalism that is actually the opposite of capitalism --with the state, price-fixing the interest rate markets (not allowing them to operate privately and freely), and people subsequently buying outcomes from that price-fixing authority to benefit themselves.

 

Even if that was true. ... an oligarchic government isn't "a basic characteristic" of capitalism.