Commitments and Contingencies

3 Months Ended

Mar. 31, 2012

Commitments and Contingencies

Commitments and Contingencies

Note 12 — Commitments and Contingencies

Contingencies

GECC Note

GECC provided debt financing for the joint venture between NBCUniversal and us, in the form of an $815.5 million non-amortizing senior secured note due 2023 bearing interest at an initial rate of 8% per annum until March 2, 2013 and 9% per annum thereafter (the “GECC Note”).  The GECC Note is an obligation of the joint venture.  We have an approximate 20% equity interest in the joint venture and NBCUniversal has the remaining approximate 80% equity interest, in which we and NBCUniversal each have a 50% voting interest.  NBCUniversal operates two television stations, KXAS-TV, an NBC affiliate in Dallas, and KNSD-TV, an NBC affiliate in San Diego, pursuant to a management agreement.  LIN TV has guaranteed the payment of principal and interest on the GECC Note.

In January 2011, Comcast Corporation acquired control of the business of NBCUniversal and now owns and controls 51% of NBCUniversal, LLC, while a wholly-owned subsidiary of GE owns the remaining 49%.  GECC remains a wholly-owned subsidiary of GE.

In light of the adverse effect of the economic downturn on the joint venture’s operating results, in 2009 we entered into an agreement with NBCUniversal covering the period from March 6, 2009 through April 1, 2010 (the “Original Shortfall Funding Agreement”), and in 2010, an agreement covering the period from April 2, 2010 through April 1, 2011 (“2010 Shortfall Funding Agreement”).  These agreements provided that: (i) we and NBCUniversal waived the requirement that the joint venture maintain debt service reserve cash balances of at least $15 million; (ii) the joint venture would use a portion of its existing debt service reserve cash balances to fund interest payments on the GECC Note in 2009 and 2010; (iii) NBCUniversal agreed to defer its receipt of 2008, 2009 and 2010 management fees; and (iv) we agreed that if the joint venture does not have sufficient cash to fund interest payments on the GECC Note through April 1, 2011, we and NBCUniversal would each provide the joint venture with a shortfall loan on the basis of our percentage of economic interest in the joint venture.

Because of anticipated future cash shortfalls at the joint venture, in 2011 we and GE entered into an agreement (the “2011 Shortfall Funding Agreement”) covering the period from April 2, 2011 through April 1, 2012, and in 2012, an agreement (the “2012 Shortfall Funding Agreement”) covering the period from April 2, 2012 to April 1, 2013.  Under the terms of the 2011 Shortfall Funding Agreement and 2012 Shortfall Funding Agreement, we agreed that if the joint venture does not have sufficient cash to fund interest payments on the GECC Note through April 1, 2013, we and GE would each provide the joint venture with a shortfall loan.  Shortfall loans funded by us under the 2011 Shortfall Funding Agreement and 2012 Shortfall Funding Agreement are calculated on the basis of our percentage of economic interest in the joint venture, and GE’s share of shortfall loans are calculated on the basis of NBCUniversal’s percentage of economic interest in the joint venture.  Solely to enable the joint venture with NBCUniversal to obtain shortfall loans from GE under shortfall funding agreements, in 2011 the joint venture (i) amended its credit agreement with GECC, (ii) amended the LLC Agreement governing the operation of the joint venture, and (iii) received the consent of Comcast Corporation to the terms and conditions on which GE provides its proportionate share of any joint venture debt service shortfall under the 2011 Shortfall Funding Agreement.  GE’s obligation to fund shortfall loans under the 2012 Shortfall Funding Agreement is conditioned upon the receipt of the consent of Comcast Corporation to the terms and conditions on which GE provides its proportionate share of any shortfall; provided that Comcast’s consent may not be unreasonably withheld.  NBCUniversal acknowledged and agreed to the terms of the 2011 Shortfall Funding Agreement and 2012 Shortfall Funding Agreement.

Under the terms of the joint venture’s TV Master Service Agreement with NBCUniversal, management fees owed by the joint venture to NBCUniversal will continue to accrue, but are not payable if any existing joint venture shortfall loans remain outstanding.

We recognize shortfall funding liabilities to the joint venture on our consolidated balance sheets when those liabilities become both probable and estimable.  These liabilities become probable and estimable when joint venture management provides us with budget or forecast information of operating cash flows and working capital needs indicating that a debt service shortfall is probable to occur, and for periods beyond joint venture management’s forecast, we develop our own internal estimates of debt service shortfalls.  Additionally, we accrue shortfall funding liabilities only when we have reached or intend to reach a shortfall funding agreement covering the period for which we estimate debt service shortfalls to occur.

As of December 31, 2011, we had a shortfall liability of $4.1 million recognized for any potential shortfall loans to the joint venture during 2012 and into 2013.  During the three months ended March 31, 2012, pursuant to the 2011 Shortfall Funding Agreement with GE, we funded shortfall loans in the principal amount of $0.6 million representing our approximate 20% share of first quarter 2012 debt service shortfalls, and GE funded shortfall loans in the principal amount of $2.3 million in respect of its approximate 80% share of first quarter 2012 debt service shortfalls.  As of March 31, 2012, we have a remaining accrued shortfall liability of $3.5 million for any potential shortfall loans during 2012 and into 2013.  We believe that cash shortfalls beyond the amounts currently accrued are not probable. However, our prospective shortfall obligations could vary from our estimate based upon changes in the performance of the joint venture stations and any changes to the proportionate share of each party’s debt service shortfall obligation.

Our ability to honor our shortfall loan obligations under the 2012 Shortfall Funding Agreement is limited by certain covenants contained in our senior secured credit facility and the indenture governing our Senior Notes.  Based on our 2012 and 2013 estimate of debt service shortfalls at the joint venture, and our forecast of total leverage and consolidated EBITDA during 2012 and into 2013, we expect to have the capacity within these restrictions to provide funding to the joint venture for the $3.5 million accrued shortfall liability.  As of March 31, 2012, we had availability under applicable debt covenants to fund future shortfall loans as follows: (i) $48.3 million of availability under our senior secured credit facility, and (ii) $162.0 million of availability under the indenture governing our Senior Notes.

The possibility exists that debt service shortfalls at the joint venture could exceed current expectations, including the possibility that neither GE nor NBCUniversal will continue to fund a share of such debt service shortfall loans after April 1, 2013.  Should circumstances arise in which we desire to make shortfall loans to the joint venture in excess of the limitations imposed by the covenants contained in our senior secured credit facility or the indenture governing our Senior Notes, we could seek an amendment or waiver of such limitations, but there is no assurance that we would be able to obtain such amendment or waiver on a timely basis, or at all, or on terms satisfactory to us.  If we are unable to make shortfall payments, the joint venture may be unable to fund interest obligations under the GECC Note, resulting in an event of default.

An event of default under the GECC Note would occur if the joint venture fails to make any scheduled interest payment within 90 days of the date due, or fails to pay the principal amount on the maturity date in 2023.  If an event of default occurs, GECC could accelerate the maturity of the entire amount due under the GECC Note.  Other than upon the acceleration of the principal amount upon an event of default, prepayment of the principal of the note is prohibited unless agreed upon by both NBCUniversal and LIN TV.  Upon an event of default under the GECC Note, GECC’s only recourse would be to the joint venture, our equity interest in the joint venture and, after exhausting all remedies against the assets of the joint venture and the other equity interests in the joint venture, to LIN TV pursuant to its guarantee of the full amount of the GECC Note.

Under the terms of its guarantee of the GECC Note, LIN TV would be required to make a payment for an amount to be determined upon occurrence of the following events: (i) there is an event of default; (ii) the default is not remedied; and (iii) after GECC exhausts all remedies against the assets of the joint venture, the total amount realized upon exercise of those remedies is less than the $815.5 million principal amount of, plus any accrued and unpaid interest due under the GECC Note.  Upon the occurrence of such events, the amount owed by LIN TV to GECC pursuant to the guarantee would be calculated as the difference between (i) the total amount at which the joint venture’s assets were sold and (ii) the principal amount of, plus any accrued and unpaid interest due under the GECC Note.  As of December 31, 2011, we estimated the fair value of the television stations in the joint venture to be approximately $118 million less than the outstanding principal balance of the GECC Note of $815.5 million.

Although we believe the probability is remote that there would be an event of default and therefore an acceleration of the principal amount of the GECC Note, there can be no assurances that such an event of default will not occur.  There are no financial or similar covenants in the GECC Note. In addition, since both GE and LIN Television have agreed to fund interest payments through April 1, 2013, if the joint venture is unable to generate sufficient cash to service interest payments on the GECC Note, GE and LIN Television are able to control the occurrence of a default under the GECC Note.  Since 2009, LIN Television and its joint venture partners have prevented the occurrence of a default by entering into shortfall funding agreements and funding shortfall loans to the joint venture as further described above.

If an event of default occurs under the GECC Note, LIN TV, which conducts all of its operations through its subsidiaries, could experience material adverse consequences, including:

· GECC, after exhausting all remedies against the joint venture, could enforce its rights under the guarantee, which could cause LIN TV to determine that LIN Television should seek to sell material assets owned by it in order to satisfy LIN TV’s obligations under the guarantee;

· GECC’s initiation of proceedings against LIN TV under the guarantee could result in a change of control or other material adverse consequences to LIN Television, which could cause an acceleration of LIN Television’s senior secured credit facility and other outstanding indebtedness; and

· if the GECC Note is prepaid because of an acceleration on default or otherwise, or if LIN TV is released from its obligation, LIN TV would realize a substantial tax gain of approximately $815.5 million related to its deferred gain associated with the formation of the joint venture. This amount of gain, exclusive of any potential utilization of net operating loss carryforwards or other unrealized capital losses, would be subject to U.S. Federal and various State tax rates of 35% and approximately 1% (net of Federal benefit), respectively.

Litigation

We are involved in various legal claims and disputes in the ordinary course of our business.  As such, we accrue for such liabilities when it is both (i) probable that a loss has occurred and (ii) the amount of the loss can be reasonably estimated.  We evaluate, on a quarterly basis, developments affecting various legal claims and disputes that could cause an increase or decrease in the amount of the liability that has been previously accrued.  It is possible that we could incur losses in excess of any amounts accrued.  While management does not anticipate any such loss would have a material adverse impact on our consolidated financial position, it is possible that the final outcome could have a material impact on our results of operations or cash flows in any given period.