Bain Capital Wins Again: $20-Billion Leveraged-Buyout Queen Topples, Biggest in Years, Another Private Equity Casualty

iHeartMedia finally files for bankruptcy, whole sector under pressure.

The biggest radio broadcaster in the US with nearly 850 radio stations, iHeartMedia, formerly called Clear Channel Communications – which was acquired by private equity firms Bain Capital and Thomas H. Lee Partners in a leveraged buyout at the apex of the LBO boom just before the Financial Crisis – has finally filed for Chapter 11 bankruptcy, after threatening to do so since 2010.

The company has been buckling under more than $20 billion in debt, up from $8 billion before the PE firms got their hands on it. About $10 billion of debt was loaded on the company as a result of the leveraged buyout – where the company leverages up its own balance sheet to fund its own buyout and to compensate the PE firms. And this surge in indebtedness has occurred despite large-scale asset sales, corporate shrinkage, and radical cost cutting after the buyout.

And now $10 billion in debts are going to get “restructured” away. The restructuring was negotiated with the leading creditors before the bankruptcy filing, which turns this into a “pre-packaged” bankruptcy. The court has final say over it.

The bonds of iHeartMedia have long been in the basket of “distressed debt,” meaning their prices have fallen so far to where their yields are at least 10 percentage points higher than equivalent Treasury yields. In other words, these bonds have been trading at a large discount for a while. I mentioned them for the first time in December 2015. This was also when the publicly traded portion of the shares became a penny stock (currently at $0.52 a share). Thus the restructuring deal has largely been priced into the bonds and shares.

This wasn’t the kind of surprise bankruptcy of the type that Toys ‘R’ Us had engineered, where affected bonds plunged 78% in two weeks, from no-clouds-on-the-sky 97 cents on the dollar on September 4, 2017, to the end-is-nigh 21 cents on the dollar by September 18.

During the bankruptcy proceedings, iHeartMedia will continue operating normally, the company said. Some of its subsidiaries, such as iHeartCommunications, are also included in the bankruptcy filing, but Clear Channel Outdoor Holdings is not included.

In the announcement, the iHeartMedia said:

The agreement reflects widespread support across the capital structure for a comprehensive balance sheet restructuring that will reduce iHeartMedia’s debt by more than $10 billion.

The agreement we announced today is a significant accomplishment, as it allows us to definitively address the more than $20 billion in debt that has burdened our capital structure.

iHeartMedia believes that its cash on hand, together with cash generated from ongoing operations, will be sufficient to fund and support the business during the Chapter 11 proceedings.

The bankruptcy put $9.4 billion of junk bonds and $6.3 billion in “leveraged loans” into default [here’s one of my articles on leveraged loans, their risks, and how they’re used]. This caused the default rate for broadcast & media junk bonds to spike to 20%, from 3.7%, and it caused the default rate for leveraged loans in the sector to spike to 16%, according to Fitch Ratings, which added soothingly:

While the radio broadcasting sector remains under secular pressure, top-line declines were in the low single-digit range on average across the peer group in 2017. We believe there is still inherent value in the traditional radio broadcasting sector, but balance sheets will continue to need to be right-sized to support the underlying economics of the industry.

Fitch’s suggestion that balance sheets in the sector “will continue to need to be right-sized” doesn’t bode well for investors holding those assets to be “right-sized.”

And this is what Bain Capital has to do with it.

On November 16, 2006, Clear Channel Communications, which was publicly traded at the time, announced that it had agreed to a leveraged buyout totaling $26.7 billion, including $18.7 billion for the shares plus the assumption of $8 billion in debt. The acquirers were two private-equity firms, Bain Capital and Thomas H. Lee Partners.

At the same time, Clear Channel also announced that would sell all of its TV stations and 448 radio stations in its smaller markets. This was the easy part. On April 23, 2007, all of the TV stations and 161 of the radio stations were sold to PE firm Providence Equity Partners.

The rest of the deal was more complicated and dragged out. Bain Capital and Thomas H. Lee Partners ended up raising the buyout offer, and in July, 2008, at the apex of the LBO boom, and just weeks before the Financial Crisis began to muddy up the news on Clear Channel radio stations, the majority of shareholders accepted the offer. A minority of shares continue to be publicly traded.

Then Clear Channel, which was already burdened by $8 billion in debt before the buyout, engaged in various debt transactions that funded its own buyout and compensated the PE firms. When everything was said and done, it had $18.4 billion in debt.

By April 2010, unnamed insiders disclosed to the media that the company was facing bankruptcy because it “has been unsuccessfully negotiating with some lenders to refinance its crippling debt.”

This was when the PE firms got stuck in their buyout. Originally they’d wanted to sell their shares for a big profit after a few years to the unsuspecting public, but since the idea of bankruptcy had been floated, that options was off the table, as the shares had plunged. With bonds facing default, no one wants to buy the equity, which tends to get wiped out.

This was the beginning of the bankruptcy rumors. As time wore on, they turned into officially disclosed possibilities.

The radio broadcasting business is undergoing a similar process as the brick-and-mortar meltdown, where PE firms piled into big retailers during the LBO boom before the Financial Crisis and left the sector strewn with over-indebted retailers that then got slammed by a structural shift to online that they no longer had the resources to follow. And now they’re toppling one after the other into bankruptcy.

Radio broadcasting faces pressures from advertising growth having shifted to the Internet and to mobile devices. Debt-crippled broadcasters, such as iHeartMedia, after having enriched their PE-firm owners, will take it out on their investors. And this completes another successful LBO, undertaken with great hype during the LBO boom of Merger-Monday-fame before the Financial Crisis.

Why is Sears’ CEO still touting “progress” and “improvement” even in SEC filings? Why not tell investors the truth, for once? Read… Sears is Dead Meat Walking, after Horrid Holiday Quarter 
 

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  44 comments for “Bain Capital Wins Again: $20-Billion Leveraged-Buyout Queen Topples, Biggest in Years, Another Private Equity Casualty

  1. Bookdoc
    Mar 15, 2018 at 7:38 pm

    Interesting how often Romney’s Bain Capital appears in the LBO debt nightmare stories.

    • Art
      Mar 16, 2018 at 12:50 pm

      Dumbfounding and scary that this a**hole got 47% of the vote in 2012. 60 million people!!! And he will probably win that Utah senate seat. People are completely uneducated about what Romney and his ilk are all about.
      And I would definitely fault the mainstream media for this. A recent article in the msm about retail bankruptcies gave only passing mention to ownership by PE firms, with no negative commentary about the ridiculous debt levels or asset stripping that is at the root of these bankruptcies.

  2. Scott
    Mar 15, 2018 at 8:00 pm

    To be honest, I’m a little surprised that the private equity firms didn’t take a page from the Eddie Lampert playbook and create a separate controlled entity to own the towers and other equipment while leasing it back.

    • Suzie Alcatrez
      Mar 15, 2018 at 9:57 pm

      They did:

      iHeartMedia, Inc. Announces Sale of a Select Portfolio of Its Radio Towers to Vertical Bridge for $400 Million

      Company Converts to Lease Arrangement To Continue To Use Those Towers To Broadcast Its Radio Stations

      December 11, 2014 – New York, NY – iHeartMedia, Inc. (OTCBB: IHRT), one of the leading global media and entertainment companies, announced today the sale of a select portfolio of its tower assets to Vertical Bridge for up to $400 million. The transaction is subject to due diligence and other customary closing conditions.

      • c smith
        Mar 16, 2018 at 10:15 am

        Not sure how this tactic would “protect” the PE firms, as what potential higher use is there for a radio tower? The people that control leveraged retailers (i.e. PE firms) that can move land into their own pockets pre a Chapter 11 filing have reasonable strategy, as the land MAY have a better use, and at least has some minimal instrinsic value. Not sure about a radio tower. The sale/leaseback of these towers sounds more like a fire sale to raise cash more than anything else.

        • Jim Graham
          Mar 16, 2018 at 12:47 pm

          The sale generated a $400 million positive cash flow that can go right into the PE firms pockets, leaving the buyer with a lease contract that has little or no value once the seller goes under….

  3. Gregg
    Mar 15, 2018 at 8:55 pm

    The Public Enemy (PE) Mafia and their Legalized Bust Outs (LBOs) strike again with MAUL (Make Americans Unemployed Losers). Now, time for a run for the US SINate!

  4. Fernando
    Mar 15, 2018 at 9:26 pm

    It’s become like ” in your face” financial fraud by these guys…has it always been this bad?

    • fajensen
      Mar 16, 2018 at 2:23 am

      Sure –
      It used to be a common part of the cultural lore that the exchanges were the domains of spiffs, “fast people”, side-street brokers and whatnot.

      All the way up to the 1980’s when exchanges became democratised and all the high-school students and salespeople piled in to the party. Then 1990’s and 00’ies pension reforms forced everyone into trading on the exchanges whether they wanted or not.

      I think the difference is that the old sharks were “analogue”, people, the new generations are digitalised machines, corporations, faceless, faster and much more efficient.

      • alex in san jose AKA digital Detroit
        Mar 16, 2018 at 2:27 pm

        And you oldsters wonder why Socialism is right up there with texting and skinny jeans with the youngsters.

  5. NoRush
    Mar 15, 2018 at 9:36 pm

    How much debt needs to die before people wake up that iou’s aren’t worth saving?

    • James Levy
      Mar 16, 2018 at 6:55 am

      The fascinating thing to watch is how they make sure that no one really “important” in the Power Elite gets stuck with those iou’s. It seems that only after the big inside players have limited their exposure to the fall-out that the house of cards comes tumbling down. It would make an interesting study if one could determine exactly who took a bath when Lehman went down. My guess is that the inner ring of players had all bailed before the run-of-the-mill players got stuck holding the worthless iou’s.

  6. Nicko2
    Mar 16, 2018 at 3:43 am

    Considering iHeartMedia hosts some of the most despicable right wing radio pundits; no great loss to humanity.

    • James Levy
      Mar 16, 2018 at 6:59 am

      People like Mercer and the Koch brothers will make sure that those talking heads have an outlet to keep the rage churning. Paddy Chayevsky was all too prescient when he created the Ned Beatty character in Network, making sure that Howard Beal’s show was kept on the air to promulgate the proper message to the plebs.

    • Mar 16, 2018 at 7:27 am

      It owns liberal stations too, including here in San Francisco. iHeart is trying to make money and seems to be neutral in terms of the message, as long as people listen to it, and as long as they can sell ads on the show.

    • Setarcos
      Mar 16, 2018 at 8:43 am

      Despicable action is in abundance in both wings and both practice their share of mischief relative to markets/companies. Without each other, neither “wing” could exist …and the extremes/divisions we see depend on each other to exist …not a good thing for anyone or any enterprise in the long run.

  7. marco
    Mar 16, 2018 at 6:05 am

    Romney and Bain Capital – the gift that keeps on giving.

    With vultures like this, what could possibly go wrong.

    More Billionaires for President. Yeah baby

    • Setarcos
      Mar 16, 2018 at 8:58 am

      Bain and their ilk successfully lobbied for risk corridors to prevent failure/bankruptcy. Or was that the insurance companies? Seriously, let’s go deeper in our “analysis”.

  8. raxadian
    Mar 16, 2018 at 7:48 am

    I guess asking US americans to write to their congressman asking for Leveraged-Buyouts to be made illegal would be useless?

  9. biffula
    Mar 16, 2018 at 9:09 am

    Toys R Us, iHeartradio. Who else has Bain crushed with debt?

    • Mar 16, 2018 at 11:23 am

      I don’t want to single out Bain. The business model for PE firms is the same all over. It’s just that Bain is one of the bigger ones, so they show up more often.

      You’ve also read here as part of this theme that Bain did the LBO of Gymboree in 2010. Gymboree filed for bankruptcy in June 2017. This is a fairly big deal too, with 1,281 children’s clothing stores and 11,000 employees.

  10. lenert
    Mar 16, 2018 at 9:39 am

    “I create nothing; I own.”

    -GG

  11. robt
    Mar 16, 2018 at 9:48 am

    The age-old concept of debtor’s prison actually made a lot of sense, as did many things in Olden Tymes when operators were held accountable.
    It certainly concentrated the mind knowing that there were consequences instead of rewards.

    • c smith
      Mar 16, 2018 at 10:21 am

      Instead of debtor’s prison, the Federal Reserve puts ALL of us in a “prison” of failures from the past via Quantitative Easing. QE is nothing more than the redistribution of failure across the entire economy. It explains much of the stagnation of the past decade. We can’t pay for past sins and invest in tomorrow at the same time, now matter how low the money printing drives interest rates.

    • Mar 16, 2018 at 11:25 am

      Instead of debtors’ prison, just forcibly take their smartphones and other devices away and watch them wreathe on the ground in pain for months :-]

  12. Bobber
    Mar 16, 2018 at 9:54 am

    Sounds like Bain and Thomas E Lee needed to recover the $18 billion they paid for the stock to recover their investment. They might not have that opportunity, now that the stock is worthless and debtors own the company. They probably got some fees along the way, but probably $18 billion worth.

  13. Alistair McLaughlin
    Mar 16, 2018 at 9:57 am

    The way I see it, the entire debt market is no longer working the way it should. There’s just no proper assessment of risk anymore. Need cash to keep your shareholders happy? Issue some bonds! At rock bottom yields too.

    Isn’t one of the purposes of a properly functioning debt market to price risk accordingly? These LBO bandits couldn’t do what they’re doing if bond buyers demanded a yield commensurate with the risk and the shoddy business practices. Yet we see it all the time – debt is issued and immediately flows through to the shareholders via a “special dividend”. Not one penny reinvested in the company.

    Who would lend money to a firm that operates that way? I wouldn’t want one of those stinky bonds in my portfolio. Yet they have no trouble raising the funds.

    • c smith
      Mar 16, 2018 at 10:25 am

      “…debt is issued and immediately flows through to the shareholders via a “special dividend”. Not one penny reinvested in the company.” This sorry process could not have dragged on for a decade but for Quantitative Easying (money printing). It is the key to the whole process, and systematic theft.

  14. Prototypegirl1
    Mar 16, 2018 at 10:11 am

    I turned off my radio a long time ago for a couple of reasons, first the conservative people are not conservative, then the radio stations turned to Greg with his male enhancements to fund themselves. I couldn’t stand listening to it. Now I use my phone and listen to youtube or dtube. No strange commercials and lots of variety.

  15. Ethan in NoVA
    Mar 16, 2018 at 10:15 am

    The company that owns SirusXM invested a bunch in iHeart. They’re after that, as well as the largest streaming service in the USA. If they managed to buy all three, that would be a very powerful portfolio.

    • Mar 16, 2018 at 11:30 am

      Yes, buying the secured debt is one way to end up owning or controlling a troubled company. When it buckles, ownership shifts from existing shareholders (they’re SOL, to use a technical term) to creditors. In this case, there has been a lot of juggling and jousting going on for years.

  16. Harrold
    Mar 16, 2018 at 10:44 am

    Guitar Center, another LBO by Bain, technically defaulted yesterday.

  17. Smingles
    Mar 16, 2018 at 11:14 am

    “There may be liberal radio (NPR) in the cities, but outside that radio is wingnut central.”

    Even in the cities, wingnut radio has a pretty captive audience, albeit that audience is a minority politically, usually.

    I grew up listening to Rush Limbaugh, courtesy of my parents. I look back and consider it borderline child abuse (joking– I love my parents despite their politics). Took years to dig myself out of that ultra right wing echo chamber. Seriously. Throughout high school and a good chunk of college I blamed everything bad that happened, economically, politically, socially on Democrats and liberals, reflexively, because that is what right-wing radio pounds through your head, day after day after day after day: EVERYthing is the fault of liberals, no matter how asinine and contradictory the issue at hand is.

  18. Tom Jones
    Mar 16, 2018 at 11:39 am

    A regular practice; but Puerto Rico, Greece etc., on the hook forever….

  19. mvojy
    Mar 16, 2018 at 12:46 pm

    Another notch in the bed post of Bain Capital. Their LBO’s have killed Toys R Us and iHeartMedia among others. Vultures are kinder since they don’t pick your bones until AFTER you’re deceased.

    • alex in san jose AKA digital Detroit
      Mar 16, 2018 at 2:35 pm

      It’s just capitalism working as designed. Really, people, even if you hate Marx you should read Marx to get some of the delicious, delicious outrage at how prescient he was.

      • govinda
        Mar 16, 2018 at 7:40 pm

        True, bernie and muh marxism cant help but serve as an inspiration to the throngs of jobless, skillless and clueless tide-pod eaters.

  20. Sporkfed
    Mar 16, 2018 at 2:02 pm

    Bain is trying to get the bankruptcies out of the way before midterms. Who knows how hard the political winds will blow.
    Better to cash out now and get some breathing room.

  21. Gandalf
    Mar 16, 2018 at 2:44 pm

    Wolf,

    A key fact that I am not getting out of this article is – who exactly are the people financing the debt for these LBOs that will be left with nothing at the end?

    Individual investors? Retirees suckered by cold calling chop shops a la “Wolf of Wall Street?” Banks? Big financial firms like Goldman, Sachs ? You would think Goldman, Sachs would be too smart to ever get caught in a fiasco like these failing LBOs, but they do some much shady financing that sooner or later they are going to outsmart themselves and get caught in something of their own making.

    The Senate just passed legislation to liberalize rules on financial regulation again and I smell another financial meltdown coming again. That’s why it’s important to know this answer.

    Is this going to lead to another financial meltdown like 2008?

    • Mar 16, 2018 at 5:41 pm

      It usually works this way in an LBOs:

      Initially, there is a big bridge loan by a syndicate of banks to fund the LBO. After the LBO closes and sellers have gotten their money and the dust settles, the target company issues bonds and pays the proceeds to the PE firms. The target company also borrows money (“leveraged loans”) from the banks and pays the proceeds to the PE firms. The PE firms use this money to pay off the bridge loan. They can also pocket some of it for themselves.

      Banks arrange the leveraged loans and either sell them to loan funds (the ones you have in your portfolio) or other institutional investors. Or they slice and dice them and turn them into Collateralized Loan Obligations (CLOs) and sell them to institutional investors. These are very risky loans and banks cannot keep them on their books. So off the go. These loans and CLOs can be traded like securities.

      Banks do this because they make a huge amount of money on fees. Institutional investors buy those junk bonds and leveraged loans because their yields are higher than those of other securities (and it’s other people’s money).

      If a company like iHeart gets in trouble and someone else want its assets, rather than buying the shares, they often buy the debt (bonds and loans) at a big discount. In a debt restructuring (in bankruptcy court or negotiated privately), they might lose money on the debt, but as creditors, they get part or all of the equity of the restructured company. Many times, the old shares are cancelled. And the company now has less debt and new owners.

  22. Jake Bodhi
    Mar 16, 2018 at 5:22 pm

    Can’t wait for the day when radio stations are sold off and decentralized. Who knows, local programming could make a comeback. Remember when disc jockeys with taste could get a record to break out?

  23. breamrod
    Mar 17, 2018 at 11:12 am

    that’s interesting about guitar center. I would bet that Gibson and Fender are going to take a hit too. I know guitar center owes them a bunch.

  24. Gandalf
    Mar 18, 2018 at 11:05 pm

    The younger generations have stopped listening to radio stations already.
    Whenever I go on vacation with my kids, my daughters immediately link up the rental car radio to their cellphones.
    They used to have recorded music and used a cable jack, now they have Spotify playlists and bluetooth.

    Cellphone data streaming and a choice of music playlists free of commercials and stupid DJs talking over the music is here already and is not going away – only us olde folks don’t quite realize it yet.
    It’s a huge generational shift.

    Radio stations are not going to be making a big comeback. It’s more likely that their bandwidth will get sold off eventually for other uses.

  25. Nashers
    Mar 19, 2018 at 9:55 am

    Raw capitalism hey it keeps the doors open longer. Financial stock market is no different the executive basically steal the money on lunches bonuses hiring women cars Etc and the shareholders get stuck with the bag the Toronto Stock Exchange is basically fraud other than maybe the top hundred companies the same goes with New York there’s no regulation of these small guys they just have a license to steal at least we’re being hospital to try to help somebody out and it still open go go Romney go Trump May the biggest Thief take all

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