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
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.