Welcome to the twenty-fourth Pari Passu newsletter,

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Today, we will learn more about:

1. Diamond Sports Group Chapter 11

2. Four Tips for Better Communication

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Diamond Sports Group Chapter 11

Today we will be covering the recent Diamond Sports Group (DSG) chapter 11 proceeding. In this unusual restructuring transaction, the unsecured administrative priority claimants have significant leverage over the feasibility and outcome of the proposed plan of reorganization. As pointed out by Kevin Eckhardt, Deputy Managing Editor at Reorg in a recent podcast, this situation is in stark contrast to the recent position of most administrative priority creditors in Chapter 11 cases. Bankruptcy Judges have been very willing to trample the rights of administrative priority creditors during the covid era. Such was the fate of most landlords during the wave of retail restructurings as well as that of vendors in the Sears bankruptcy.

Background – Sinclair Broadcast Group and the formation of DSG

In June of 2018, the Department of Justice (DOJ) ordered The Walt Disney Company to divest 22 regional sports networks (RSNs) as a condition for the completion of its $71.3bn acquisition of Twenty-First Century Fox, Inc. The antitrust division of the DOJ sought to, “ensure that sports programming competition [was] preserved in the local markets.” Sinclair Broadcast Group (SBGI) saw this as an attractive opportunity and in May of 2019, acquired equity interests in 21 of the divested RSNs, giving the newly formed wholly-owned indirect subsidiary, Diamond Sports Group, exclusive local broadcast rights to 42 professional teams. This included 14 Major League Baseball (MLB) contracts, which play an outsized role of importance in RSN revenue. These acquisitions were mainly financed with debt, including a $3.3bn loan, and a $4.9bn bond offering, both issued by DSG. This financing, combined with $1.4bn of cash and $1bn of preferred equity from SBGI brought the total purchase price for the RSNs to roughly $9.6bn. For the year ending in 2018, the RSN portfolio generated a combined $3.8bn in revenue across 74 million subscribers. Press Release.

Linear Television vs Direct to Consumer Streaming

The traditional cable and satellite TV business models are considered linear TV. Viewers tune in at a scheduled time and view content that is broadcast live or prerecorded and hosted on a server. Source. Examples of this include DirecTV, Charter, and Comcast.

Direct-to-consumer (DTC) streaming customers enjoy the opportunity to view broadcasts live, but also the option to watch or rewatch later. Importantly, these streams are accessed by subscribing to the platform, as opposed to a package of cable channels. Examples of such platforms include Dish’s Sling TV offering, YouTube TV, and Hulu. 

There has been a well-documented trend toward DTC streaming and away from linear TV over the past several years. According to Insider Intelligence, the decrease in linear TV subscribers is expected to proliferate in the future.

In the previously mentioned podcast, Debtwire’s Kevin Eckhardt explains that sports broadcasting has been more resistant to the trend, with fewer professional teams electing to pursue streaming contracts as opposed to traditional linear television. However, MLB (Major League Baseball) was an exception, as it has been ahead of the curve. By the time of the RSN acquisitions by DSG, MLB teams had begun to aggressively market their DTC streaming rights, chipping away at traditional RSN revenue.

DSG Business Model  

Each sports league has a minimum number of games each year that are not chosen for national broadcast. These games are available exclusively for local distribution. DSG purchases the broadcast rights from local sports teams through 3+ year contracts in order to produce and license these games to linear television providers and DTC streaming services. Revenue generation is generally based on a contractual monthly rate per subscriber. At acquisition, around 91% of DSG’s revenue came from affiliate fees from selling programming to linear TV providers and streaming services. The remainder of the revenue came from advertising. It is important to note that most of DSG’s affiliate revenue is derived from linear television carriage fees, with streaming making up a smaller portion with higher growth potential. This was a cause for concern given the consumer trend toward DTC streaming to replace existing linear television, known as cord-cutting. Additionally, new generations are opting to use streaming services, effectively never purchasing a linear TV subscription. This phenomenon is known as “no cording.”

Covid Impact

It goes without saying that Covid-19 was not great for DSG, whose revenue is dependent on professional sports games. The wave of sporting league cancelation announcements in the first half of 2020 rocked DSG’s debt trading prices. Additionally, DSG decided to draw down $225mm of availability under its $650mm revolving credit facility to preserve flexibility. The company still had sufficient liquidity to meet near-term needs, given the amount still available under the revolver and a healthy cash position. Additionally, DSG was still in compliance with its credit agreements and indentures. During the Q1 2020 earnings call on May 6, 2020, DSG announced it had received multiple pitches from investment banks to manage its deeply discounted capital structure. Ultimately, Moelis & Co was chosen, and an exchange offer was launched.

2020 Exchange Offer

The proposed transaction sought to deleverage the capital structure and reduce interest expense by swapping the 6.625% senior notes due in 2027 for a mix of cash and newly issued 12.75% first lien notes due in 2026. Effectively, this exchange was to take place at 60 cents on the dollar for the existing senior notes. The existing first-lien lenders were probably not too happy about this idea, given that the newly issued notes would be pari passu with their existing loans. Not to mention limit the trading upside of their existing loans. Additionally, the transaction would send cash out the door and decrease liquidity on the balance sheet. In order to strip the covenants from the existing 2027 senior unsecured notes, DSG would need at least 50% participation.

The unsecured bondholders did not like the economics of the deal and wanted their voices to be heard in the creation of the covenants for the new notes. The group retained Strook, Strook & Lavan to explore alternative options. The final deadline to tender unsecured notes to participate in the transaction was set for June 9^th, 2020. Less than 4% of the holders decided to tender, marking this attempt at liability management as a massive failure.

2022 Exchange Offer

Later in February of 2022, DSG announced that a new exchange offer had been completed, this time much more successful than the first attempt. The exchange involved the 5.375% Secured notes due in 2026. Around 99.5% of the holders agreed to exchange at a 1% discount into Secured Second Lien Notes.

Bankruptcy Filing

On March 14^th, 2023, after missing a $140mm interest payment, DSG filed for bankruptcy in the Southern District of Texas before the Honorable Judge Christopher M Lopez. DSG is armed with a restructuring support agreement. Recognizing the growth potential of streaming, DSG wants to set up an MLB streaming platform through its Bally Sports app, which would include 14 teams (whose broadcast rights DSG owns) and allow users to stream games anywhere. The problem is that MLB had previously taken back team streaming rights, communicating to the teams that it would retain control until streaming is economically equivalent to linear broadcasting. DSG contends that it has valid contracts with the 14 teams to stream their games. The MLB essentially has veto power over these agreements. As such, they withheld the DTC streaming rights for 9 of the 14 teams. During first-day hearings, DSG admitted that the economics of the streaming platform would only work if it were able to obtain the rights for all 14 teams. However, the MLB prefers to keep these rights for use in its own MLB.tv streaming platform.

Kevin Eckhardt points out that the linear streaming business alone will not be able to service the debt load post-bankruptcy. The streaming platform is crucial to the going concern of the business. Additionally, the majority of the funded debt creditors have agreed to a restructuring support agreement (RSA) dependent upon DSG producing a viable business plan by August and coming to an agreement with the leagues over streaming rights. The RSA will leave the first lien lenders unimpaired, while other secured and unsecured creditors are equitized, meaning they will receive the reorganized equity post-emergence from bankruptcy. DSG has reached an agreement with the NBA and NHL that is valid through the end of the year. This leaves the dispute with the MLB over streaming rights, which has been holding up the case.

Because of the automatic stay in bankruptcy, the counterparty to an executory contract with a debtor is essentially in limbo until the contracts are either accepted or rejected. The decision to assume or reject is not required until the confirmation of the plan of reorganization. The MLB and the teams filed a motion to compel DSG to either reject the streaming rights contracts with the 5 teams it currently has or accept them on an accelerated basis and make payments. DSG wants the rights of the 9 remaining teams in order to create a viable business. There is an additional dispute over what the debtors should be required to pay during the bankruptcy and post-emergence should they assume the contracts.

Following a two-day trial over the broadcast rights, Judge Lopez ruled that the contracts must be paid in full and that such payments are administrative expenses necessary to the preservation of the estate. He did not, however, compel the debtors to make a decision to accept or reject on an accelerated basis. The Judge is clearly tired of the squabbling, asking the parties multiple times to come to an agreement over control of the DTC rights.

Four Tips for Better Communication

Good communication is essential for getting what you want out of every relationship. Many of you are at the point where you will start forming the most important relationships in your life (boss, business partner, key client, spouse, etc). If you cannot communicate well, your work, personal life, and aspirations will never be shared beyond yourself. Here are four tips that I encourage you to consider and apply, irrespective of the content you are communicating.

These tips come from a number of sources, but the primary ones include Victor Cheng’s Career and Life Newsletter and Bruno Nogueira’s Work Smarter Newsletter.

1. Clarity: Good communication is clear communication + Pyramid Principle

Before you write or speak with someone, consider their familiarity with the content.

• Know exactly what you mean to say and ensure that what you say has exactly one interpretation for them

• If the other person is more senior or less involved, include the verified data source/model/deck/etc referenced in your message

  • If someone has to embark upon an hours-long database safari to validate what you are saying (or has to wait for you to do this), they will not want to work with you again

Additionally, consider how they will use what you communicate. Barbara Minto created the Pyramid Principle after her time at McKinsey & Company (where she was the first female MBA hire) to ensure that communication is structured, logical, and actionable.

• Present the core conclusion or answer first as simply and directly as you can

• Next, provide the three-to-five supporting arguments for your conclusion/answer grouped in a MECE (mutually exclusive and collectively exhaustive) manner

• Finally, provide the supporting details for each argument, also grouped in a MECE manner

If there is ambiguity in how they respond, ask clarifying questions.

• You cannot read the other person’s mind, and they cannot read yours

• There is a significant probability that what they said or wrote is not what they meant

• Making assumptions only damages a relationship by dislocating expectations

  • You are a human, not a computer- you need to be your own interpreter regardless of your technical skills

Consider how the language you are using may distract from what you are saying.

• Take ownership of what you say (“I appreciate your time” not “appreciate the time”)

• Be as active as possible (“person X will complete task Y by date Z,” not “task Y will be completed”)

• Use results, not adverbs/adjectives (“sales increased by X% from date Y to date Z,” not “sales increased impressively”)

• Avoid words that take space without adding value (just, actually, clearly/obviously, that being said, to be honest, etc)

 2. Format: Deliver negative communication in person + Walk, Talk, Write Principle

Delivering negative communication in person shows respect for the other person and gives what you are saying backbone.

• Just as they will be in a vulnerable position when you deliver the bad news, you are showing vulnerability by being the “face” of the message

• In-person communication allows you to adjust to their real-time reaction and pad your message with sentiments lost over email or a call, like empathy and understanding

  • No matter how you feel about the person, you do not gain anything by making this a worse experience for them

If your positive communication is non-urgent, take the time to write it down.

• This is especially true if it is news that the other person (or you) may benefit from revisiting

• For example, do not expect someone senior to you to accept a meeting request reviewing your accomplishments for the week

• However, if you neatly summarize your accomplishments and email them to this person every week at a consistent time, you will be perceived as someone who is continuously delivering and is reliable

  • When performance reviews come around, you will have given them ample accomplishment capital to deploy to your benefit

If your positive communication is urgent, deliver it in person.

• Before doing this, ask yourself whether there could be a difference in the perception of urgency between you and the other person

  • This may be the only project you are working on but one of many projects the other person is overseeing

McKinsey also pioneered the Walk, Talk, Write Principle, which governs how consultants should deliver difficult news or request something from someone else.

• You should first walk over to the other person’s desk and speak with them one-on-one

• Next, call their phone so that you can concentrate on the matter simultaneously

  • These first two methods also foster a stronger network by talking to people in-person and over the phone, which creates a more personable connection

• Finally, write to the other person

  • Prioritize Teams/Slack over email, because they are more likely to see your message instantly, perceive it as a higher priority, and respond quickly

3. Tone: Demonstrate your respect for the existing power hierarchy

When you communicate, you are conveying both technical and emotional knowledge.

• If you cannot get the emotional component right, it does not matter how sophisticated or impressive your technical knowledge is

• Both what you communicate and the manner in which you communicate are important

Demonstrate this emotional knowledge by making requests, not demands.

• When you are requesting something from someone else, you are affirming their worth, agency, and power

• You are giving them a choice, not a mandate, to honor what you want, strengthening the relationship and demonstrating that you either recognize your positions as equals or your respective positions on the existing power hierarchy

  • Recognizing the existing power hierarchy is key to avoiding conflicts at work

• For example, say that you want to increase your promotion potential at work by taking ownership over more of your workstream

• Telling your manager that you would like a greater view of the impact of your work and are eager to take upon higher-level tasks is a demand (it also puts the burden on them to concoct something worthwhile for you to do and then check for your mistakes when you finish)

• Instead, find a solution to satisfy your desire and request that your manager gives you the autonomy to do this

  • For example, “I noticed that task X is always done by person Y after I complete task Z. I am interested in taking more ownership over my workstream, would it be okay with you if I completed task Z and checked it with person Y before sending to you?”

  • Your manager is probably fine with this request, but this language gives them the power to decide

As someone early in their career, you do not realize how little you know. Until you can gain this knowledge with experience and hindsight, you must be open to being wrong and solicit feedback to learn.

• For example, imagine someone superior to you makes a wild statement that you believe to be inaccurate

• Naturally, you may be inclined to flex your impressive one-to-two years of experience as an intern/analyst and tell them that they are wrong and that you are right

• Instead, in a private, safe setting for the other person (one in which they will not be embarrassed if they are wrong), explain that you arrived at a different conclusion and ask if they can share their feedback on your thought process or help you identify the mistake in your thinking

• This format assumes that you are wrong and they are right

  • It also demonstrates that you recognize your respective positions on the existing power hierarchy and positions you as a professional who is curious and eager to make their job easier

4. Timing: Avoid assuming that the other person’s first availability to speak with you is their best availability

If your communication requires the other person’s full attention, tell them that you have an important topic to discuss and organize a time to discuss it at a mutually convenient time.

• You do not know what the previous hours or days of the other person's life have looked like, even if you were “with them” at work or home

• Our perceptions of their life are skewed toward our very limited interactions with them

• Do not damage their ability to process and take action from what you say by assuming that they have the time or bandwidth when you do

• Find a time when you can both be level-headed and focused on the topic at hand

Additionally, consider how long you have been thinking about what you are about to say.

• If you have contemplated something for days or weeks, do not expect the other person to match your understanding instantly when you tell them

• Anticipate this beforehand and be ready to follow up in the way that would be most helpful to them

  • For example, have the relevant files cleaned and pulled up before your meeting and draft a summary email that you can send immediately after

Finally, remember that the other person’s availability and reception towards what you want to discuss does not render your communication worthwhile.

• Everyone’s time is a gift- treat it that way

• Do not take every opportunity to complain; consider instead whether the issue is something you can tolerate in the long term and is therefore worth resolving rather than accommodating

  • Keep in mind that the “long term” is very dependent on your relationship- your long-term relationship with your spouse will hopefully be longer than your long-term relationship with your boss

Bonus: My friend/associate/partner/boss/etc never considers these things, why should I?

At the end of the day, remember that you work for and are exclusively accountable to yourself. The other person’s inability to develop their communication skills does not excuse the inferiority of your own simply because you are in a relationship together. If your current relationships do not respect these skills, find better ones that do. Become someone that others want to have enduring personal and professional relationships with.

Even better, if this person is a peer, forward this email along and encourage them to subscribe to Pari Passu here. In the words of one of our treasured Instagram followers, “Pari Passu is love. Pari Passu is life.” Have a great weekend.

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