Clear Channel’s debt covenant creep

September 1, 2009

There’s been a rush to return to business as usual among big banks itching for deal-making and investors wanting to ease the pain from last year’s financial crash.

And there’s a long list of things to be thankful for as we come up to the one-year anniversary of Lehman Brothers’ bankruptcy. Financial system stabilized, check; government committed to supporting basket-cases like Fannie Mae and Freddie Mac, check; the economy improving, check; credit flowing to needy companies, check.

But then along comes Clear Channel to remind us that there’s still plenty of excess to be wrung out of the system before we can check off the most important item on the list: credit crisis over.

Last week, the company bought back $412.1 million aggregate principal of five unsecured bonds maturing between 2011 and 2014 at a steep discount, which should at least give the company some breathing room when it comes time to refinance its still remaining $1.4 billion of debt that comes due between 2011 and 2013.

But the company had to use precious cash on hand to execute the tender offer, highlighting its other troublesome problem: debt covenants.

When Bain Capital and Thomas H. Lee Partners moved in with a $19 billion offer for Clear Channel during the height of merger madness in November 2006, the financing for the deal looked easy.

Investors couldn’t get enough of high-yielding debt and banks were falling over themselves to court favor with private equity firms by offering attractive rates and few restrictive covenants.

Things started heading south for the Clear Channel deal, though, in 2008. The banks and the private equity firms bickered in court about the financing terms, investors stayed away when the bonds were put up for sale in September and the nose-dive in the U.S. economy meant the once generous covenant threshold moved into the sight-lines.

The debt covenant pertains to the company’s senior secured debt, which stood at around $15.9 billion at the end of the second quarter. This debt cannot exceed 9.5 times adjusted EBITDA — a level that no longer looks out of bounds given the recession’s hammering of Clear Channel’s core radio and advertising revenue.

As of the end of June, the company’s senior secured debt stood at 8.1 times adjusted EBITDA, up from 7.1 times in March. Standard & Poor’s estimates that the tender offer nudged the ratio up to 8.2.

If it’s breached, the company would be in default, leaving the banks with two options: either restructure the company’s huge debt or amend the terms of the secured debt for a price — higher interest rates and fees. Given the company’s once contentious relationship with its creditors, the banks are likely to drive a hard bargain.

S&P says the company could cross the covenant line by year end if EBITDA slides by about 32 to 33 percent in the second half of the year. And as big as that decline is, it would be an improvement over the first half.

One option would be to refinance a Clear Channel Outdoor $2.5 billion intercompany loan to its parent, an idea the company floated earlier this year that could bring down its debt ratio. But this would rely on the kindness of lenders who have become much more discriminating. So far, the company has been mum on this course.

For the moment, Clear Channel is off the radar as summer vacations and upcoming anniversaries divert attention elsewhere. But the little matter of its debt covenant could come back into sharper focus later this year and remind investors that the credit crisis is still crunching.

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