Coronavirus poses an existential threat to the established economic model of the live entertainment industry
By TJ Chambers
Photo by Pablo Heimplatz
The economic and cultural carnage of the Coronavirus pandemic with concert and festival cancellations, venue shutdowns, furloughs at Artist agencies, Promoters / Producers, and event postponements until who-knows-when, marks a period of fundamental retrenchment for the live entertainment industry as currently configured.
The suspension of events and entertainments in the presence of an audience is not due to a change in the fundamental desire for a communal shared experience of cultural performance, rather it is because of the global health security and social welfare restrictions over safe public assembly and travel.
However, the lockdown has starkly revealed the fragile fiscal underpinning of the current economic model of the live entertainment industry (Artist > Promoter > Venue > Sponsor > Ticketing > Consumer) with its fundamental reliance upon the end-consumer to advance-fund the sector’s operations.
As previously noted, the live industry has responded to the enforced shutdown and the cessation of its consumer-fueled cashflow with the wholesale suspension of operations and layoffs to save on expenses, and for those larger scale corporations able to borrow, the taking on of new debt-financing:
Live Nation Announces Credit Agreement Amendment, Additional Revolving Credit Facility And Cost Reduction Program: https://www.prnewswire.com/news-releases/live-nation-announces-credit-agreement-amendment-additional-revolving-credit-facility-and-cost-reduction-program-301039214.html
Endeavor Sets $260 Million Loan Amid Coronavirus Revenue Crisis: https://variety.com/2020/biz/news/endeavor-260-million-loan-ufc-wme-coronavirus-1234603358/
Eventbrite Announces Financing with Francisco Partners: https://www.businesswire.com/news/home/20200511005832/en/
Live Nation Entertainment Announces Pricing And Upsize Of Private Senior Secured Notes Offering: https://www.prnewswire.com/news-releases/live-nation-entertainment-announces-pricing-and-upsize-of-private-senior-secured-notes-offering-301058991.html
The key disadvantage of this form of financing i.e. borrowing against future earnings is that businesses are obligated to pay back, on a regular schedule, the principal borrowed with interest – in the case of the Live Nation 13th May offering which closed 20th May, $1.2Bn at 6.5% annual interest.
Normally companies would consider this type of financing when targeting growth or expansion opportunities (utilising the increased revenues, cost-savings and synergies of the acquisition to pay back the debt), so organisations already suffering from cash flow problems may have a more difficult time repaying the interest let alone the principal.
A company typically raises capital via the sale of equity (with dividend payments to the shareholders) and/or via the acquisition of debt (with interest payments to the creditors), with the sum of equity and debt financing referred to as the cost of capital.
In normal times a company would decide upon which new projects and operations where the return on investment generated a greater amount than the cost of capital deployed. If returns on its capital expenditure are below its cost of capital, then the firm is not generating positive earnings for its investors. In this case, the company may need to re-evaluate and re-balance its capital structure.
In the current circumstances with the urgent short-term need for increased financing – to assist in the refunding of cancelled events, maintenance of a reduced level of corporate management and operations, and the effective rescheduling of postponed events – has led to some negative market sentiment with several live entertainment stocks now being downgraded:
Disney downgraded in a grim appraisal of its coronavirus pain and future prospects: https://www.fastcompany.com/90500601/disney-downgraded-in-a-grim-appraisal-of-its-coronavirus-pain-and-future-prospects
Creative Artists Agency’s Debt Gets Downgraded: https://www.forbes.com/sites/mikeozanian/2020/05/04/creative-artists-agency-debt-gets-downgraded/
Endeavor’s Credit Rating Gets Downgraded on Live Events Exposure: https://www.hollywoodreporter.com/news/endeavors-credit-rating-gets-downgraded-live-events-exposure-1290092
Live Nation Gets Credit Rating Downgrade at S&P Global: https://www.hollywoodreporter.com/news/live-nation-gets-credit-rating-downgrade-at-s-p-global-1294438
Nothing published within this post constitutes a professional investment recommendation in any way whatsoever, nor should any content presented, or opinion expressed be relied upon for any investment activities. Readers are strongly urged to seek their own independent investment advice and/or speak with a qualified investment professional before taking any investment decision.