Capital Markets

Revolver Saved by “Goodwill” of Lenders

A $2.76 billion goodwill impairment charge would have broken a debt covenant, but the travel company's bankers agreed to new, although costlier, te...
Sarah JohnsonFebruary 19, 2009

Expedia has amended its credit facility to avoid violating a debt covenant before recording a $2.76 billion goodwill impairment charge for the fourth quarter of 2008. The impending writedown had put the company’s revolver — and the $650 million it had borrowed  — at risk.

Like many companies, Expedia tested for goodwill in December as the liquidity crisis and falling stock prices triggered businesses to conduct the reviews under generally accepted accounting principles. In Expedia’s case, it is adjusting for the lost market value of assets acquired several years ago. The charge “certainly doesn’t reflect the overall health or strength of our businesses,” said CFO Michael Adler during a conference call with investors today.

Expedia, an online travel company whose brands include,, and TripAdvisor, reported a $2.76 billion net loss for the fourth quarter. A year ago, it had reported a $65 million profit for the same quarter. The company attributes the large decrease to the $2.76 billion impairment of goodwill and a writedown of $223 million in intangible assets.

The economic downcycle has triggered many companies to take such noncash charges for impairment of goodwill on deals made during the M&A heyday, which are reflected in recent earnings announcements. Sprint Nextel, for instance, wrote down the last $1 billion of its goodwill impairment for its 2005 Nextel purchase, the company said today, reflecting a $1.6 billion total loss for last quarter.

While the goodwill writedowns have no effect on a company’s cash holdings, they imply that the business overpaid for a previous acquisition. A writedown also may affect, as in Expedia’s case, agreements previously made with lenders. Expedia nipped animpending violation in the bud by renegotiating with the holders of its $1 billion credit facility, for the fourth time since it was established nearly four years ago. Its lenders include Bank of America and Royal Bank of Scotland.

Under the previous debt agreement, Expedia could have lost the revolver if its consolidated net worth went below $3.5 billion. “They saw the problem ahead of time,” explains Morningstar equity analyst Warren Miller. Now, instead of a specific net worth,the new terms include a minimum interest coverage covenant rather than a tangible net worth covenant. Also, the company now has some tighter restrictions, and its borrowing rate increased by 200 basis points.

Even with the amended revolver, Adler said in the conference call the company’s liquidity has not been affected. Expedia did not immediately return’s request for further comment.

Indeed, Expedia plans to pay down $550 million of the $650 million it has borrowed from its revolver by tomorrow. However, considering the current credit markets, the company may keep a cash cushion until it’s clear whether the revolver can be extended beyond its August 2010 expiration date. “A lot of companies have bet on refinancing happening and have gotten trapped,” Adler said. “We don’t want to fall into that same trap.”


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