Monday 26 August 2019

Distressed-debt lenders aid Getty Images in Shutterstock battle

Getty Images, the company founded by Irish passport holder Mark Getty, looks set to tap up investors to help revive its business as a price war rages

Competition in the stock photo sector became even more cut-throat with the advent of the internet
Competition in the stock photo sector became even more cut-throat with the advent of the internet Newsdesk Newsdesk

Getty Images, the digital photography pioneer set up by Irish passport holder Mark Getty, has in recent times been struggling for cash amid a price war with newer rivals.

However, it is getting a lifeline - from investors known for profiting from distress. For the investors, which according to people with knowledge of the matter include Archview Investment Group, DE Shaw Investments, MatlinPatterson Global Advisers and Silver Point Capital, the deal is proving a truism in distressed-debt investing: to make money, be prepared to spend first.

For Getty, it means a much-needed $100m (€93m) to help revive its so-called midstock business, which sells rights to images that are less expensive than exclusive stock photos such as Alfred Eisenstaedt's iconic World War II kiss in Times Square. Getty also splashed out €110m to buy Kerry entrepreneur Jerry Kennelly's Stockbyte in 2006.

The company -which is owned by the private-equity firm Carlyle Group - will use the cash partly to improve the technology that helps customers find the photos they want. Getty's midstock business is under pressure from lower-cost competitors like Shutterstock and Adobe Systems' Fotolia, which provide images from amateur and semi-professional photographers to a growing number of internet-based publishers.

"It's very tough to get cash when the business is struggling," said Erik Gordon, a law and business professor at the University of Michigan. "In that sense, Getty won by getting the cash it needs."

The new money is part of a debt swap agreement between Getty and a group of bondholders that owns about 65pc of the company's $550m in unsecured bonds, the sources said. Investors agreed to provide the capital and swap about 43pc of the unsecured bonds at a discount for higher-ranked debt, they said.

Under the terms, Getty will exchange its investors' old bonds for new ones at a rate of 64c on the dollar, swapping about $235m of old obligations, paying 7pc interest for new first-line debt. The total face value of the new obligation will be $252.5m and it will pay 10.5pc, they said.

The investors demanded a 5pc discount on the $100m portion of the notes, meaning Getty will receive $95m in cash, the people said. They are also getting a $2.5m structuring fee.

"The bondholders are jumping up and down," Gordon said. "They are getting more value on their debt and were bumped up in the capital structure."

The investors taking the deal will be exchanging old obligations that traded at 30c (before news of the swap deal) for new ones that rank as high as debt trading at about 68c, according to data compiled by Bloomberg. Holders who bought the notes after February 23, when the company disclosed it had burned through a third of its cash in the final quarter of 2014, would have paid no more than 63.3c, the data shows.

Representatives for Carlyle, Archview, DE Shaw, MatlinPatterson and Silver Point declined to comment.

"The incremental liquidity is positive but the incremental debt and interest expense are negative," said Geof Marshall, a portfolio manager at CI Investments, whose firm owns some of Getty's bonds. "I'm disappointed in the sponsor because growth capital is supposed to be equity."

Marshall concurs with an assessment from Moody's Investors Service that the new capital should be in the form of equity, not debt. The ratings firm on Wednesday downgraded the company one level to Caa1 from B3, saying it would need "more time than previously expected to improve credit metrics, including leverage and free cash flow."

The grade wasn't initiated because of the new financing agreement, the ratings firm said. "Although cash balances would increase initially by roughly $90m post-transaction, planned funding of growth investments and higher debt service will leave the company with only adequate liquidity and limited ability to reduce debt balances over the next 18 months," Moody's said in its report.

Moody's senior analyst Carl Salas said last week that while the new investment will help increase revenue and cut some expenses, the problem is that its success won't be measurable for at least a year.

Getty will use the cash in part to increase its marketing efforts and develop a consumer-facing business, Salas said.

Getty has been trying to shore up its balance sheet since August. The agreement requires approval from loan holders before it can be finalised.

The company said in a statement on Tuesday, in response to questions about the agreement, that it is "pleased with the progress we are making in our capital-raise process, as well as the delivery and momentum of another strong quarter's results."

Getty told holders of its nearly $2.5bn of debt last week that a measure of its earnings improved in the quarter to end of September, people with knowledge of the matter said last Tuesday. Its earnings before interest, taxes, depreciation and amortisation were $69.6m, about 1pc higher than last year.

The company took in about $202m of revenue, adjusted for currency fluctuations. That was flat compared with a year ago.

Revenue from the midstock division fell but the pace of the decline slowed from the previous two quarters.

The unit posted sales of about $50m in the period, which was 8pc less than the prior year. Revenue had declined by 10pc and 15pc in the previous two quarters compared with a year earlier.

Getty roughly doubled its cash from June, ending the third quarter with approximately $39m on hand.

"They got lucky this round," John Harrington, publisher of Photo Business News, said last week. "It'll help them stay around a little longer - but I don't see it as such a game-changer that it's going to turn the company around."

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