The covenant-lite and PIK-toggle era may be gone but the creative debt structures still have their supporters.

Partly credited for keeping the default rate low by lowering the threshold for companies to go belly-up, the terms refer to the loose conditions agreed during the buyout boom when funding was readily available. 

At a conference on Wednesday organized by The Deal, Blackstone’s COO Tony James volunteered a spirited defence of the structures, when questioned about his views on the current low default rate.

“”I can’t resist, since you opened that up,” James told Deal reporter David Carey, “by saying that this is why covenant lite, pik-toggles, those kinds of things which people look at as aberrations (are good)… I believe that those kinds of structures are in everyone’s interests and the economy’s interests. ”

Private equity benefits, he said, because the company is more able to survive; while by keeping the company intact, creditors and customers are kept from fleeing.
 

The Clear Channel deal may seem like the longest, most drawn out LBO ever, but at least it looks like this time it could be the end of the drama.

One big safeguard in the new agreement is that the banks and the private equity buyers have agreed to put all their equity and debt obligations into escrow within ten and seven business days.

As Clear Channel’s CEO Mark Mays notes, this greatly increases the certainty that the deal will close.

It’s a pretty unusual state of affairs though.

“Look at this in the context of the litigation history here, there’s no small amount of distrust between the company, the sponsors and the lending group,” said Joel Greenberg, partner and co-chair of law firm Kaye Scholer LLP’s Corporate and Finance Department, who described the escrow arrangement as “about as secure as you can get”.

Given the history of the Clear Channel deal — a bidding battle, shareholder pressure forcing the price up twice, quirky offerings like stub equity, litigation and courtroom drama – almost nothing could surprise anymore about this deal.  

But unless shareholders upset the applecart when it goes to a vote this summer, this could, at last, be the final cut.
 

By Dane Hamilton

Who’s afraid of the big bad SEC? Not Phil Goldstein.

“The SEC is not there to protect investors,” scoffed Goldstein, an outspoken hedge fund manager in an industry shrouded in secrecy. “The SEC is so tied up in red tape and garbage that they are useless.”

Goldstein, who runs the $500 million activist hedge fund Bulldog Investors, was just getting going as he delivered an off-the-cuff address to investors yesterday in New York.

The former civil engineer, who started his hedge fund in 1992 at age 47 - an age when many successful fund managers are looking to retire - is now gearing up for a new campaign against what he says is useless and counterproductive hedge fund regulation.

Among his pet peeves “general solicitation” rules, which bar fund managers from pitching their strategies to “unsophisticated investors,” or people without money.

Most hedge fund managers interpret this as a gag order to varying degrees, forcing most to speak only “off the record” to the media and others for fear of arousing a reputation-damaging regulatory investigation or fundraising block.

Goldstein has a darker view, equating the fear to pre-World War II Germany, when no one challenged Nazis as they shipped Jews and gypsies off to death camps.

“This culture of silence and fear reminds me of how people acted when the Nazis started rounding people up,” Goldstein told an audience of hundreds of investors at an Argyle Executive conference, only half-jokingly.

And why not abolish “accredited investor” rules too? The rules - which basically bar anyone but millionaires from putting money into hedge funds - smacks of a Nanny State in which investors are protected from themselves, he said.

Anyone can invest and lose money in commodity futures, stock markets, mutual funds or gamble in Atlantic City - but not hedge funds. “Who the hell is the SEC to tell me what I can invest in?” Goldstein asked.

Goldstein has reasons to stick his finger into regulatory eyeballs. He won a lawsuit in 2006 that forced the SEC to drop rules requiring hedge funds to register as investment advisors. Now he’s being sued by William Galvin, the Massachusetts Commonwealth Secretary, for not properly barring his Web site from giving access to “non-accredited investors.”

“Galvin, up until recently, was an Eliot Spitzer wannabe,” sneered Goldstein. “He hates hedge funds. It’s like a modern day Salem witch trial. Anything that goes wrong must be due to hedge funds.”

Goldstein, who said he’s looking for legal support in an industry that is terrified of regulators, has some ideas on how history will view him. He compared his campaign to that of Rosa Parks, the 1960s black civil rights figure who refused to move to the back of the bus.

“A hundred years from now, no one will know who Steven Cohen is or John Paulson is,” said Goldstein, referring to two of the most successful hedge fund managers around today. “But they will all know Goldstein vs SEC. It will still be on the books!”

The SEC declined comment.

As the Clear Channel situation gets messier, some who ended up on the sidelines are feeling relieved they didn’t jump in.

Blackstone, part of the bidding group which lost out to Thomas H. Lee Partners and Bain Capital, feels “OK that we didn’t pursue that deal,” senior advisor Jill Greenthal said at Argyle Executive Forum’s media conference in New York. Greenthal said there were a lot of deals the firm passed on.

“One example that we bid on, is Clear Channel,” she said. “We were offered leverage beyond what we accepted - which would have helped to increase our returns on paper. We were not comfortable that was a prudent way to set the company up… in terms of what would happen in the (economy). So I think we feel OK that we didn’t end up pursuing that deal.”

Not everything is rosy for Blackstone. Freescale has some issues, although Blackstone feels “fine about where we are with it”, she said.  Previously a unit of Motorola before it was listed separately on the stock market, Freescale was bought in 2006 by a private-equity consortium led by Blackstone for $17.6 billion - one of the major covenant lite deals inked.  “Because we have the capital structure that we do, and the good management team that we have in place, we have the wherewithal from a capital structure to be able to re-position the business and invest in it the way we want to,” she said.

Even so, the credit situation is still pretty brutal.

“The credit situation has been unbelievably horrible… It’s loosened up so maybe it’s now, I don’t know, just incredibly horrible,” was Greenthal’s summation.

(Photo - Reuters)

What makes Norman Pearlstine cranky? Not getting his daily fix of media website paidContent.org.

The Carlyle Group advisor and former Time Inc. editor-in-chief, was lobbed a question about what he feels crucial to read every day,  after speaking at the Argyle Executive Forum Leadership in Media conference in New York.

“I must say that the one thing I’ve got very cranky if I don’t get is Rafat Ali’s
paidContent.org,” Pearlstine said, referring to the website started by Ali in 2002. “I think he does, with a relatively small staff, a remarkable job of pulling together coverage of what’s going on in new media and a fair amount of traditional media. If there’s one thing every day I look for that’s it.”  

That doesn’t mean newspapers are done for though – although they won’t generate the margins they used to before the rise of the Internet, Pearlstine said during the conference.

“With the very quick development of the Net, newspaper margins really just went south very quickly,” he said. “They remain viable businesses, they remain capable of generating consistent cashflow, but they are not going to have the kinds of margins again that they’ve had in the past. ”

Presumably that’s because Pearlstine can’t take his eyes off paidContent…

(Photo: Reuters)

They didn’t quite have the skill of the LA Lakers.

But a bunch of private equity’s finest put in at least as much energy as the Los Angeles professionals last night in bashing their hedge fund rivals and helped raise some $750,000.

A match to raise money for Youth, I.N.C. a non-profit focused on children, saw the fifteen minute game end 32-24 to the buyout men.

Not that this wasn’t also a matter of pride.

“We won last year too,” noted Clayton Dubilier & Rice’s Rick Schnall, after the match. “This year they had college basketball players and we still won!”

MidOcean Partners’ Ted Virtue, from the private equity team, quipped:  ”We played well - but as you know, the private equity guys are smarter than the hedge fund team.”

On the private equity side: players were Ted Virtue, MidOcean Partners; Rob Berner, CVC Capital Partners; Ron Blaylock, GenNx360;  Rick Schnall, Clayton, Dubilier & Rice; Jacob Capps, Lion Capital; Luke Long, Thomas H. Lee Capital; Rick Schifter, Texas Pacific Group and Michael Beal of Morgan Stanley.

The hedge fund team was led by Marc Lasry, Avenue Capital. Players included Ryan Renteria, Karsch Capital; Andrew Fishman, Schonfeld Group; Funsho Allu, AIG Investments and Steve Cronin of Schonfeld Group.

(Photo from ©2008 ImageLinkPhoto.com/G. Chesman. For more pics click here)

A deal to sell the Chicago Cubs baseball team was originally supposed to be clinched last year. That’s slowly slipped and now some fear it could even take till after the 2008 baseball season before its owner Tribune finds a new owner for the loveable losers.

To be sure, there’s a lot of activity going on behind the scenes, with talks to sell Wrigley Field to Illinois state moving forward. But the complexities involved mean it’ll likely be months before a deal for all the assets — the field, the team and a stake in a sports TV network - is sorted out. 
    
The flip side is that for real estate tycoon Sam Zell, who led the $8.2 billion buyout of Tribune, it doesn’t matter much. Since Tribune is now a privately owned company, it doesn’t have the pressures of quarterly deadlines and vocal shareholders.
    
However, the pressure is at an all-time high for the Cubs team, which is trying to win its first World Series title in 100 years.  
    

The paperwork going back and forth on the Clear Channel case is piling up.

According to a filing from the banks being sued last night, it could increase almost exponentially.

“Discovery from the banks alone will involve the collection and review for production of hundreds of thousands of pages of documents and e-mails,” they say in a filing where they ask the court to dismiss claims against them.

In fact, it seems as though there were few people who didn’t have some kind of involvement with the deal.

“…given the size and nature of the contemplated transaction, individuals from numerous areas within each of the banks were involved, including their merger acquisitions, loan syndications, high yield syndications, asset based finance, private equity, capital markets, and securitization groups. In addition, more than twenty individuals from the sponsors and the company have been directly involved with the negotiations and dozens more have played some role… Even if depositions were limited to the five individuals with the greatest level of involvement from each of the banks, the sponsors and Clear Channel, respectively, there would be 40 depositions.”

To read the bank’s response click here.

The fight centers around the agreements struck between the banks and the buyout firms. A credit agreement dated last week is buried in these documents (split into four parts):

Part one Part two Part three Part four

The Commitment Letter and lawsuits can be found here.

Six Wall Street banks are being sued by Clear Channel and the private equity firms trying to buy it, and this is the guy they’re up against.

“I grew up loved. And I grew up fighting,” proclaims lawyer Joe Jamail, who represents the buyers, on his website. “I have never been able to stand by and let someone abuse another person. I have to go in and help. And win.”

This picture, taken from his website, we’re assuming is more than 20 years old as the Pennzoil case Jamail famously won was in 1985.

Clear Channel scored a first-round victory this morning by getting a temporary restraining order from judge John D. Gabriel preventing the banks reneging on their commitments — in other words, maintaining the status quo. (Read the document here)

That follows the lawsuits filed last night in Texas (full document here) and one in New York (full document).

Meanwhile, tracking down the documents the lawsuits cite isn’t an easy task. The commitment letter is on the SEC web site, but only if you know just where to look. Save yourself some work by clicking here instead.

Where’s Exhibit A? 

JPMorgan’s deal to buy Bear Stearns has a lengthy merger agreement, but tracking down one important document is proving a challenge.

The Option Agreement, or “Exhibit A”, which supposedly details an option JPMorgan has to buy 20 percent of Bear’s shares, is only mentioned in the agreement, not attached.

Even three days days after the deal was announced, the document hasn’t been filed with the SEC or posted on the companies’ websites. If anyone’s found it please slip it this way and we can make public something that, surely shareholders need to know?

If you’re searching for the merger agreement, the easiest way we’ve found to reach it is on the front of Bear Stearn’s website.