Granite Loan Problems Capture Attention.

AT first blush, Granite Broadcasting Corp. looks like one of many TV-station companies pummeled by the slump in ad revenues.

But New York-based Granite stands apart from the pack in its corporate history, maverick moves and degree of potential pain. With the disclosure last month that it needs to amend a senior credit agreement signed in March, Granite is attracting closer scrutiny of the heavy mortgage on its future.

In a bold bid to become NBC's affiliate in San Francisco, Granite agreed last year to pay $362 million over a 10-year period to the network, a General Electric Co. subsidiary. The deal rocked the broadcast industry because NBC, along with Walt Disney Co.'s ABC and Viacom Inc.'s CBS, historically has compensated its affiliates, not vice versa. Granite already has made a payment of $27.8 million, and its KNTV is set to become the NBC affiliate Jan. 1. The next payment, for $37.2 million, is due a year later.

To protect NBC in the event of a default, Granite has given the network the inside track to buy KNTV and a $34 million lien on KBWB, Granite's second station in the San Francisco market. Only now is it dawning on some onlookers that NBC is positioned to nab one of Granite's crown jewels without an auction if Granite misses its 2003 payment.

Minority control

If Granite sheds assets or puts itself up for sale, the action may slash the number of minority-owned U.S. television licenses, which at last count numbered just 23 out of 1,288 commercial stations. Granite, which owns nine stations, ranks as a minority-controlled firm because 55 percent of its voting shares are held by Chief Executive W. Don Cornwell, who is black and was a Goldman Sachs investment banker before he founded the company in 1988.

In its early years, Granite was able to buy TV stations at a discount, thanks to a tax break offered by the Federal Communications Commission to broadcasters who sold stations to minority-owned or controlled companies.

Granite bought six of its nine stations before the tax program was repealed in 1995 by Congress, which declared that the FCC standards were so vague that the program appeared to have been subject to significant abuse.

By then, Granite had already demonstrated some survival skills, as it weathered an economic downturn in 1991 to make its initial public offering in early 1992. The company went public at $7 a share.

In the succeeding years, the stock price climbed as high as $14.75, but averaged about $7.41. Granite has closed no higher than $3.56 this year.

In the quarter ended June 30, Granite's revenue declined 18 percent and its broadcast cash flow fell 64 percent from a year earlier, prompting Credit Suisse First Boston analyst Bob Kricheff to remark that Granite's results were "significantly weaker than any peer company that we are aware of in the high-yield or equity markets."

Granite's corporate credit rating was lowered in mid-August to "CCC+" from "B-" by Standard & Poor's, which cited weak cash flow and concerns about the company's expensive capital structure.

"Debt divided by EBITDA (earnings before interest, taxes, depreciation and amortization) was excessively high at 65x and debt plus debt-like preferred stock divided by EBITDA was more than 100x," the credit-rating company said.

In a filing with the Securities and Exchange Commission, Granite said it is seeking to amend its recent $205 million senior credit agreement because it expects to fall short of certain financial tests as of Sept. 30. A company spokesman said last week that senior Granite officials weren't available to comment because they were on vacation.

The loan - negotiated with Goldman Sachs Credit Partners LP and Foothill Capital Corp. -- matures Dec. 31, 2003, and is "loaded with high hurdles," Barclays Capital analyst Sam Grier said.

The lenders "will likely shorten Granite's leash still further and extract greater compensation, perhaps along the lines of additional deferred interest," said Deborah M. Ryan, an analyst with KDP Investment Advisors Inc., in a recent report.

Kathryn Harris is a columnist with Bloomberg News.

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