Capital problems
Response to the following problem:
The stockbrokers Merrill Lynch (ML) claimed that GCap Media plc (Capital), the business that owns the London-based Capital Radio commercial station, breached its loan covenants. Capital's bankers required the business to maintain a net debt to annual earnings ratio of at most 3.0 and an interest cover ratio of at least 4.0. ML claims that both ratios were actually 3.3, meaning that Capital had broken the covenant on both counts. ML claimed that this had arisen as a result of falling advertising revenues for the radio station, particularly for its breakfast programme. Capital denied breaching the covenants and referred to forecasts that it would do so as ‘speculation'.