iHeartMedia's Chapter 11 Filing: What Happens Next for the Radio Giant

iHeartMedia and some of its subsidiaries filed for Chapter 11 protection last night after reaching a pre-packaged agreement with its principle creditors that will apparently see the company cut its debt in half to $10 billion after a debt-to-equity swap with some debt holders; and the spinoff of Clear Channel Outdoor Holdings, which is not a part of the Chapter 11 proceedings.

According to an announcement on the iHeart website, the prepackaged “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. iHeartMedia, America’s No. 1 audio company, will continue operating the business in the ordinary course as a leading global multi-platform media, entertainment and data company.”

A pre-packaged Chapter 11 proceeding is a cleaner, less costly process that provides a quicker resolution of a company’s debt problems. It  is meant to insure that the company can continue operating as smoothly as possible to preserve the company’s value as much as possible. Without a pre-packaged solution the process can take a lot longer as the different classes of creditors tend to fight over the solution that each class hopes will yield the best pennies on the dollar solution as possible, with the Chapter 11 judge acting as the referee.

In fact, some of the creditors didn’t like the way the pre-packaged Chapter 11 negotiations were going and made a pre-emptive move in late February when they asked the New York State Supreme Court to grant an injunction that would provide a provisional lien against some of the chain’s radio assets, in a move to give that class of creditors the same level of protection of other classes of iHeart debtors. At presstime it was unclear how that matter was proceeding. 

Typically, companies working toward a pre-packaged solution that will re-structure a company’s balance sheet allows for a shorter stay operating under Chapter 11 protection, which means reduced legal and financial consulting costs for all parties, the company and the creditors; as well as preservation of the company’s equity.

On the other hand, in one of the first day motions, the company asked to the proceeding to be designated a complex Chapter 11 Bankruptcy Case, which usually means it will take longer and be more expensive.

“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,” iHeart chairman and CEO Bob Pittman said in a statement. “Achieving a capital structure that finally matches our impressive operating business will further enhance iHeartMedia’s position as America’s No. 1 audio company...iHeartMedia has created a highly successful operating business, generating year-over-year revenue growth in each of the last 18 consecutive quarters. We have transformed a traditional broadcast radio company into a true 21st century multi-platform, data-driven, digitally-focused media and entertainment powerhouse with unparalleled reach, products and services now available on more than 200 platforms, and the iHeartRadio master brand that ties together our almost 850 radio stations, our digital platform, our live events, and our 129 million social followers.”

While  the company has a total of $20.4 billion in long-term debt, about $13 billion of that is secured; and those are the investors who probably are the main beneficiaries of the pre-packaged agreement. Consequently, the largest unsecured creditors includes subordinated debt holders as well as trade partners like the major music companies, which provide licensing so that its digital radio service can operate legally; and in turn are owned royalties.

According to the company's Chapter 11 filing, the 14 percent senior note holders, 7.25 percent note holders and 6.875 percent note holders combined are owed $2.4 billion, while the largest unsecured trade creditor is listed at Nielsen at $20.9 million. Also on the list, are SoundExchange, due $6.4 million, Warner Music Group $3.9 million; Spotify $2 million; Global Music Rights $2 million; ASCAP $1.5 million; BMI $1.43 million; and Universal Music Group $1.3 million.

While the filing includes all of the company's radio operations, its non-debtor affiliates, including Clear Channel Outdoor Holdings and Clear Channel International BV, are not among the iHeart companies seeking Chapter 11 protection.

The company was acquired by private equity firms Thomas H. Lee Partners and Bain Capital Partners in an $18 billion leveraged buyout that ultimately saw debt totaling about $20 billion. The heavy debt on its balance sheet became a constant struggle for the company to withstand as its owners wheeled and dealed to continue refinance debt in order to lower interest payments down through the years. But finally last year, it began warning creditors that unless they could negotiate a debt restructuring, it would be unable to meet its debt obligations coming due this year. The more than year-long negotiations between the company and its creditors evolved into this pre-packaged Chapter 11 filing. In the weeks leading up to this filing it became a daily watch as creditors and the media visited the SEC website everyday to see if the company had reached another forbearance agreement or this pre-packaged Chapter 11 agreement.

In addition to filing for Chapter 11 protection, in the U.S. Bankruptcy Court for the Southern District of Texas, Houston division, the announcement said that the company had already filed typical “first day motions,” that will allow the company to maintain business as usual for its operations. While the company didn’t specify which motions it was pursuing, the first day motion usually includes a request to allow the company access to its cash on hand but didn't include a DIP loan because the company believes that its cash on hand and cash generated from operations to sufficiently fund iHeart during the Chapter 11 proceedings. 

On the other hand, in previous filings that accompanied its forbearance agreement that proceeded the Chapter 11 filing while the company was working on this agreement over the last few weeks, company documents stated that as part of the pre-packaged agreement the company will get new funding sources in the form of a new senior secured asset revolving credit facility, and a new secured $5.75 million in debt. 

Other first day motions requested permission to make payments to various service providers like utility providers, as well as paying employees and allowing it to operate its cash management systems, and other things needed to allow the company to continue to operate day-to-day.

Hovering in the background of the prepackaged Chapter 11 filing, Liberty Media, which already owns a controlling interest in Sirius XM, had offered to give iHeart $1.16 billion for its financing needs in exchange for a 40 percent equity stake in the restructured radio company. It's unclear what role, if any, this offer will take in the pre-packaged Chapter 11 filing.

In previous filings with the SEC, some details of the the pre-packaged negotiations were disclosed. At that time the agreement called for Clear Channel Outdoor Holdings, iHeart's billboard advertising operation, to be spun off from the company, with the holders of the term loan credit facility claims and the priority guaranteed notes maturing in 2023 to become the holders of the economic interest in the Outdoor operation. It also calls for other debtors to receive new iHeart stock, or a combination of new stock and special warrants, with the amounts for each creditor weighed against the amount of debt they hold from the company.

Kirkland & Ellis LLP is serving as legal counsel to iHeartMedia, Moelis & Company is serving as the company’s investment banker, and Alvarez & Marsal is serving as financial advisor.