The New York Times. April 04, 2020

B4 N THE NEW YORK TIMES, SATURDAY, APRIL 4, 2020

VIRUS FALLOUT

Boston University’s Questrom
School of Business. “If the econ-
omy is not doing well, if firms are
bleeding cash as a result of Covid,
we’re not going to be seeing too
much advertising.”
Ads became an unavoidable
part of modern life for a simple
reason: They work. Each dollar
that companies spent on advertis-
ing in the United States last year
led to $9 in sales, the research firm
IHS Markit estimated. And while
the barrage of marketing mes-
sages can seem like background
noise, their absence would be con-
spicuous.
The ad industry employs about
500,000 people in the United
States. Their work blankets movie
screens, smartphones, buildings,
stadiums and inbox-clogging pro-
motional emails. Companies that
regularly buy ads are the lifeblood
of TV networks, podcast compa-

nies, news outlets, lifestyle publi-
cations and pretty much all of the
internet — and when they spend
less on marketing, there is a ripple
effect.
During the Great Recession,
more than $60.5 billion in global
ad spending evaporated, accord-
ing to the WARC research group.
It took eight years for the industry
to fully recover.
Close observers of how the ad-
vertising business has fared in re-
cent weeks say the new crisis may
be worse.
“It was a seismic shock, possi-
bly the biggest we have faced,
ever,” said Harris Diamond, the
chief executive of the advertising
company McCann Worldgroup.
“It all took place in a very short
period of time, and is having an
impact everywhere we communi-
cate.”
Overall spending on digital ads
for March and April is down 38
percent from what companies had
expected to lay out, and ad spend-
ing has fallen 41 percent on TV, 45
percent on radio, 43 percent in
print publications, and 51 percent
on billboards and other outdoor
platforms, according to the trade
group IAB.
Advertising giants like Inter-
public Group and Publicis have
suspended their financial fore-
casts, saying they were uncertain
about the future. The Cannes Li-
ons conference, one of the biggest
events on the ad-industry calen-
dar, was postponed last month,
then canceled early on Friday.
The major TV networks will not
be hosting their annual New York
gathering, known as the upfronts,
to hype their fall shows before an
audience of corporate sponsors
and ad executives. Similar events
for digital platforms like YouTube
and Hulu were also postponed.
“We’re working through this as

it’s unfolding, just like everyone

else,” said Patty Morris, an assist-

ant vice president of marketing

for the insurance company State

Farm. “There are things happen-

ing that we’ve never seen before.”

State Farm had planned to ad-

vertise during National Basket-

ball Association games and the

N.C.A.A.’s annual men’s basket-

ball tournament. It had also ex-

pected to run ads during coverage

of the Summer Olympics on Pea-

cock, the streaming service that

NBCUniversal is scheduled to

start nationwide on July 15. And

now?

“We’re trying to deal with all of

the cancellations, trying to under-

stand what’s happening here,” Ms.

Morris said.

With production studios shut

down, and filming of commercials

at a standstill, a bare-bones style

of advertising has emerged. On a

recent night, the NBC late-night

host Jimmy Fallon read out a

State Farm ad in the manner of a

podcaster at the start of his shot-

from-home episode of “The To-

night Show.” After plugging the in-

surance giant, Mr. Fallon held up a

scrap of paper on which one of his

daughters had scrawled the com-

pany’s website address.

On YouTube, the “Tonight

Show” episode was preceded in

some cases by a State Farm com-

mercial called “New Normal,” a

mash-up of old footage and videos

made by nonprofessionals.

Many companies are trying to

protect their brand names by

keeping their ads away from me-

dia reports about overrun hospi-

tals, joblessness and death.

As news organizations ramp up

their coronavirus coverage, they

are losing out on the revenue that

would have come their way in

more pleasant times, because

many companies have stipulated

that their ads must not appear

near articles that include out-

break-related keywords.

British news organizations, in-

cluding The Guardian and Daily

Mail, wrote in an open letter this

week that so-called blacklisting

will cost news outlets more than

$60 million if the pandemic lasts

another three months. “Readers

are relying on us right now, and

we are relying on advertising,” the

publishers noted.

The companies that have con-

tinued to advertise are treading

lightly as they try to find a way to

keep customers aware of their

products while acknowledging

the pandemic. Kentucky Fried

Chicken reacted to the changed

atmosphere last month by cancel-

ing a British commercial, set to a

Chopin nocturne, that showed

dozens of people eating chicken

and licking their fingers.

In online ads, Audi and Volks-

wagen have spread out the letters

and symbols in their logos to en-

courage social distancing. A

Times Square billboard made for

Coca-Cola by a McCann agency

also presented the company logo

with the letters spaced apart.

A recent commercial from Lin-

coln, part of Ford Motor, under-

scored the theme of isolation. Cre-

ated by the Hudson Rouge agency,

the ad repurposed footage of a

woman and a child in a sparsely

decorated house in the middle of

nowhere. A voice-over seems to

address life during quarantine:

“More than ever, your home is

your sanctuary.” The commercial

then shows Lincoln picking up a

car that needs servicing and leav-

ing a loaner vehicle in its place.

“A lot of clients are shifting their

messaging to what they think is

going to be most useful to

customers, to how they can help,”

said Michael Epstein, a media-

planning executive at the market-

ing company Dentsu Aegis Net-

work.

Many ads now feel like public

service announcements. The flu

medicine company Mucinex in-

troduced an educational cam-

paign called “Spread Facts, Not

Fear.” Images related to washing

increased 600 percent in ads on

social media last month, accord-

ing to an analysis by the Pattern89

artificial intelligence platform,

and depictions of crowds fell 54

percent.

“Today, if you get the tone

wrong, it’s an unforgivable sin,”

said Mr. Diamond of McCann.

“The ability to reach audiences is

unparalleled right now, but their

willingness to accept marketing

messages is limited to the right

messages.”

Jittery Companies Pull Back Ads in ‘Seismic Shock’ to Business

Times Square this week. Coca-Cola is among the many companies that have reduced or “gone dark on” their ad

campaigns, wary of marketing at a time of overrun hospitals and mounting death tolls during the coronavirus crisis.

PHOTOGRAPHS BY JOSHUA BRIGHT FOR THE NEW YORK TIMES

FROM FIRST BUSINESS PAGE

‘There are things

happening that we’ve

never seen before.’

The recent misfortune of Ameri-
can businesses — many of which
are struggling to raise cash to stay
afloat — is creating new money-
making opportunities for hedge
funds and private equity firms,
big investors that have been rela-
tively unscathed by the pandemic.
With hundreds of billions of dol-
lars sitting in reserve, these firms
are plotting strategies to extend
high-interest loans to companies,
especially smaller, already trou-
bled ones that banks have largely
shunned over the past decade.
Private equity firms, in particular,
are also exploring buying minor-
ity stakes in public companies,
which would provide them with an
immediate cash infusion. But for
companies exploring these so-
called alternative lending options,
the relief may come at a high cost.
“The problem for companies to-
day is everybody has less money,
and the cost of capital has just
gone up a lot,” said Marc Lasry, a
founder of Avenue Capital Group,
a $14 billion investment firm that
specializes in distressed assets
and loans to medium-size busi-
nesses.
Ever since the coronavirus pan-
demic shut down major parts of
the economy, companies of all
sizes across a swath of industries
have raced to shore up the cash on
their books. Big-name businesses
with good credit have turned to
commercial banks and big Wall
Street firms for financing help, or
issued bonds directly to investors.
But there are far fewer options for
companies that already carry a lot
of debt, or are deemed risky by in-
vestors because they operate in
industries, like retail, entertain-
ment, energy or tourism, that

have been hit especially hard by

the pandemic.

Avenue, Fortress Investment

Group and Apollo are among the

big investment firms with dedi-

cated funds for making loans to

smaller companies. These firms

and smaller ones, such as Pen-

nantPark and MGG, are working

with existing borrowers and look-

ing for companies that are show-

ing signs of distress.

One of Apollo’s lending funds

recently bought a portion of a $2

billion loan that a group of banks

arranged last month for United

Airlines, a person familiar with

the matter said. The deal, re-

ported earlier by Bloomberg

News, will give the airline much-

needed access to cash after the

pandemic battered its business. It

also allows the banks to reduce

some of their risk.

In late February, just before the

coronavirus slammed the United

States, a group of alternative lend-

ers including PennantPark, An-

tares Capital and Ares Manage-

ment put together a $345 million

loan package for NSi Industries,

an electrical products manufac-

turer, according to Dealogic, a

deal tracking service.

“We had some of our best re-

turns coming out of the global fi-

nancial crisis,” said Art Penn,

founder of PennantPark, which

has $3.5 billion in assets and lends

to about 135 companies, with an

average of $300 million in reve-

nue. “We are having discussions,

and we are exploring avenues to

allocate capital.”

There are few deals at the mo-

ment. But there are preliminary

signs of activity in the alternative

lending market, which Preqin, a

data firm, estimates has $58 bil-

lion in untapped lending power in

North America.

Dylan Cox, a private equity ana-

lyst with PitchBook, a division of

Morningstar, said most private

equity firms were focused on

keeping their portfolio companies

afloat. But he expected that in the

coming months, big private equity

firms will look to buy stakes in

strapped companies ahead of full-

blown takeovers down the road.

“Everything is in a bit of a lull

now,” Mr. Cox said. “That starts to

happen as soon as the dust set-

tles.”

Hedge funds and private equity

firms are pursuing ways to profit

off the current crisis much as they

did during the 2008 financial melt-

down. At the time, a type of deal

known as a PIPE, or private in-

vestment in public equity — in

which a publicly traded company

sells stock or debt to private in-

vestors — became especially pop-

ular with private equity firms.

Hedge funds are also scouring

for opportunities to short the

stocks of public companies amid

the market turmoil. Shorting in-

volves buying shares with bor-

rowed money and selling them,

betting that the share price will

drop and the fund can buy them

back at the lower price and pocket

the difference.

Restructuring lawyers said that

in a bid to avoid bankruptcy, some

companies might reach out to pri-

vate equity firms for help.

The medical device company

Nevro said this week that it would

sell stock and debt to raise financ-

ing. Nevro said it expected to

price the shares at $84 each, a dis-

count to its closing price of $89 the

day before the announcement.

The deal is expected to attract

bargain-seeking hedge funds and

private equity firms. In the offer-

ing document, Nevro noted that

some investors in the convertible

bonds — debt that can convert

into shares — would “employ a

convertible arbitrage strategy”

that could have them shorting, or

betting against, the company’s

stock.

Taking a stake in a beaten-down

company is not without risk. In

2008, the private equity firm TPG

gave a $1.3 billion lifeline to Wash-

ington Mutual, once one of the na-

tion’s largest savings and loans.

When the federal government

took over WaMu less than six

months later, TPG took a big loss.

But the temptation for private

equity firms to pounce may prove

irresistible. In the United States,

the industry is sitting on $740 bil-

lion in so-called dry powder: the

amount of money that pension

funds, sovereign wealth funds and

other investors have committed to

fund buyouts or equity invest-

ments, according to PitchBook,

which captures data on private

equity firms.

“This crisis will present an op-

portunity for good lenders to par-

ticipate in the great reconstruc-

tion to lift us out of this,” said Peter

L. Briger Jr., a Fortress chief exec-

utive. “But it is not clear when that

will happen.”

With so many companies in

need of cash, deep-pocketed in-

vestors can be choosy. Some may

see the current crisis as an oppor-

tunity to renegotiate deal terms or

even walk away, restructuring

lawyers and investment bankers

said.

The Apollo-backed lender Mid-

Cap Financial, for example, just

backed out of a $20 million loan it

had agreed to provide to Senior

Care Centers, a nursing home op-

erator that is set to emerge from

bankruptcy, court filings show.

Lawyers for MidCap, which spe-

cializes in health care lending,

cited “credit risks inherent in the

growing Covid-19 epidemic and

the particular risks posed to at-

risk skilled nursing facility popu-

lations.”

The move sent lawyers for the

nursing home operator scram-

bling to find an alternative lender.

An executive with MidCap did not

respond to a request for comment.

Investors See Opportunities

In Companies Sent Reeling

“The cost of capital has just gone up a lot,” said Marc Lasry, a founder of the Avenue Capital Group investment firm.

CHRISTOPHER GOODNEY/BLOOMBERG

By MATTHEW GOLDSTEIN

Hedge funds and

equity firms seek to

make high-interest

loans or buy stakes.