Bain Capital and Thomas H. Lee Parters, the equity owners of iHeart Media, are trying to pull off a high wire act to balance its massive $19 billion debt load -- and have dangled the possibility of bankruptcy if things go awry.
Its trying to restructure some $14 billion of that debt by getting itself more time to pay it off while also getting a reduction it what it owes. It is offering to replace loans with new facilities and existing bonds with new discounted notes that mature at a later date. In exchange, debt holders would also receive stock shares in its separately publicly traded Clear Channel Outdoor Holdings. Depending on the participation, bond holders would receive their pro-rata share of a pool of about 39 percent of CCOH’s stock. As of April 20, CCOH had a market capitalization of about $2.05 billion, according to Yahoo finance.
But so far, debt holders have twice turned up their nose at their deal -- even with two extensions. So the offer was sweetened and the deadline extended for a third time to April 28, and so far appears to be rebuffed by bond holders.
So on April 20, instead of the carrot sweetener, iHeart offered the stick, releasing preliminary financial information and saying it may have an insolvency issue sometime later this year if the debt holders don’t take their current deal now. In other words, it's playing chicken with its creditors, saying take what it's offering now or there might be a Chapter 11 bankruptcy filing, which likely could result in a much lower payout.
iHeart first made its offer for a deal on March 15, and gave bond holders until April 5 to tender their notes.
So, what kind of a deal is iHeart offering lenders? It's asking bond holders in a series of notes due on different maturity dates and each paying different interest payments, totaling about $8 billion, to exchange their notes for new ones that mature, in general, two years later, and generally paying two percentage points in lower interest rates than the existing notes, while also forgiving some of the debt.
iHeart offered a three-tiered swap, depending on a low participation scenario, mid-level participation scenario and high participation scenario, with the low participation rate issuing new bonds that would be discounted 12 percent and pay 88 cents on the dollar; while mid-level participation would result in a 17 percent discounting paying 83 cents on the dollar; and high participating would gain the company a 25 percent discount, paying 75 cents on the dollar.
But when none were submitted, it extended the offer to April 14, and still didn’t receive support from bond holders, with only $3.1 million in old notes tendered for the swap. So on April 13, it sweetened the payout for both mid-level and low-level participation to 90 cents on the dollar, leaving high-level participation at 75 cents on the dollar; and extended the offer again to April 28.
Meanwhile, the banks supplying $6 billion in two term loans are being asked to also forgive debt, which was also sweetened to the tune of 90 cents on the dollar, depending on participation levels, or 75 cents on the dollar if the offer gets high participation from the consortium of lenders to the two term loans. The loans maturation date would be extended two years to 2021. They had until April 21 to approve the swap.
On April 20, one day ahead of the loan providers' April 21 due date on the offer, and one week ahead of when the bond holders are supposed to tender their notes. Bain and Tommy Lee switched from the tactics and showed the stick, reminding debt holders that in its 10-K annual report filing to the SEC, that it may have a “going concern” issue during 2017.
The 10-K noted that the company’s “forecast of future cash flows indicates that…(it) would not be sufficient for us to meet our obligations, including payment of the outstanding receivables based credit facility balance at maturity, as they become due in the ordinary course of business."
While its fiscal first quarter ended March 31, it doesn’t have to make its 10-Q filing until 40 days after the quarter close, or about May 10. But that’s beyond the April 28 bondholders' deadline, so the company has released preliminary first quarter results, which once again bring up the “going concern” issue.
With negative cash flows projected for 2017, due to the maturities of a $305 million receivables-based credit facility, and $112 million in notes due to be redeemed on jan. 15, 2018, management says that its upcoming 10-Q disclosures indicate “substantial doubt as to our ability to continue as a going concern” for the 12 month following the close of its first quarter.
Its annual interest expense has risen from about $1.55 billion in 2012 to $1.85 billion last year. Last year the company had about $2.14 billion in earnings before interest, taxes, depreciation and amortization. For 2017, the company says it expects interest expense to total $1.7 billion, with the $417 million in debt coming due, its total debt expense would total about $2.17 billion, which would swamp EBITDA total it produced in 2016.
So far this year, the company’s preliminary first quarter numbers shows it will have about $114.06 million in operating profit on $1.33 billion in revenues, down considerably from the $420.7 million in operating profit, on $1.36 billion in revenues in posted in the year earlier quarter. So already, the company is not off to a good start of matching last year’s EBITDA total.
Bain and Tommy Lee, in effect, are telling bondholders that they should take the offer on the table, which may result in a haircut of either getting 90 cents or 75 cents on the dollar and lower interest payments; or run the risk that the company may have to file for Chapter 11 sometime in the next year. If that happens, a lot of uncertainty comes into the process.
More than likely, the equity players, Bain and Lee get wiped out in a Chapter 11 filing, but there’s no guarantee that a restructuring or a liquidation would achieve a 75 cents on the dollar payout to all debtors. It could be substantially lower, and maybe only the guaranteed lenders get a payout with the subordinated lenders also possibly looking at a wipeout. In other words, there are a lot of possible scenarios if the company has to go down that road.
But all of that uncertainty might be staved off, if the bond holders and the term loan providers take the offer now on the table, which is the heart of the message from the equity players to the debt holders.