Tuesday, February 10, 2009

Is Clear Channel Communications Preparing For A Chapter 11?

And the uber-leveraged LBO dominoes keep falling. The spotlight now turns to Clear Channel Communications (CCU) which was acquired a brief 6 months ago in July 2008 for $20 billion in one of the biggest LBOs of recent years. In this curious case, sponsors Tommy Lee and Bain Capital were so much in love with their overpriced provider of billboards and radio stations, that they, and the company (which of course knew it was getting a great price for its shares, even at the amended $36/share) sued the banks who were aware they would be unable to place the insane amount of debt needed to complete the LBO (most recently CCU had $19.6 billion of total debt on $2.2 billion of declining EBITDA, or cash flow).

Yesterday, Clear Channel, which has a $2 billion, six-year revolving credit facility, filed an 8-K disclosing it had drawn the remaining $1.6 billion balance it had available. The text provided in the 8-K was a paltry and insufficient two sentences:

Clear Channel Communications has borrowed the approximately $1.6 billion of remaining availability under its $2.0 billion revolving credit facility. Clear Channel made the borrowing to improve its liquidity position in light of continuing uncertainty in credit market and economic conditions.
The biggest concern for investors is that CCU does not actually need this cash currently, thereby raising questions about what is really going on behind close doors, especially since CCU would incur an additional $75 million in annual interest as a result of the drawdown. Any potential issue is likely not related to its net bank debt leverage covenant, which has a 9.5x ceiling, while the company is currently at roughly 6x on this metric.

So what is going on? Traditionally preemptive bank runs of this nature are indicative of something more troubling. Maybe the company has realized that the likelihood of raising a DIP in this environment is negligible, which is why it is using the revolver draw down as a "cheap" DIP (see Nortel). However, the fact that it might even be considering the DIP option, should send shivers down bondholders' spines... And also the spines of LPs in Tommy Lee and Bain, who blew over $2 billion of equity on this acquisition less than a year ago, especially when they could have easily scuttled the deal by siding with the banks against the company... It will be curious to see how the PE firms explain this huge potential loss to their declining investors.

Key items to keep an eye out for: whether Lazard is hired over the next few months (just kidding, any overpriced restructuring vultures will do), whether CCU continues tendering for assorted bonds, and whether the company will roll its $500 million 4.25% notes due May into its Delayed Draw Term Loan.
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Anonymous said...

i would say the drawdown IS related to potential violation of the bank covenant by YE09....

Anonymous said...

Perhaps CC is simply paying down more expensive debt with cheaper debt.

Anonymous said...

I am not an expert in CCU but here are my thoughts. Even when CCU is still far away from breaching its debt covenant (3.25 times EBITDA), this cushion will be gone sooner or later (f.i. as early as by the end of 2009. CCU can see that it is on it's way down and even when they take cost cutting measures etc. they know that they very likely have to re-negotiate covenants at some point or even have to try to restructure parts of or the entire capital structure. Assumably they are in a much stronger position to do this when they have a lot of cash on your balance sheet (think of an exchange offer f.i.) rather than having the on balance sheets of it's banks (which are not in good shape themselves by the way. So far as I know there have not yet been problems reported from corporates not being able to draw their revolver even when they are in compliance with their covenants but the given that the system is very fragile these days CFO's may want to start to be on the safe side in this regard. Given that CCU is cash flow positive it is somewhat unusual that they draw their revolver now but in my view they are strengthening their position thereby.