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.
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 has offered to replace loans and bonds with new facilities and replace old bonds with new discounted notes that mature at a later date, in exchange for also receiving 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% 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, bond holders have twice turned up their nose at their deal - even with two extensions.So last week the offer was sweetened and the deadline extended for a third time to April 21 (today), only to be once again rebuffed by bond holders.
So today, they extended another week and instead of the carrot sweetener, the investors offered the stick, releasing preliminary financial information and saying it may have an insolvency issue sometime later this year if the bond holders don't take their current deal now. In other words, its playing chicken with its bond holders, saying take what it's offering now or there might be a Chapter 11 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 last week, they sweetened the offer and extended the deadline to April 21 (today), only to be once again rebuffed by bond holders. So today, they extended another week and instead of the carrot, the company offered the stick, releasing preliminary financial information and saying it may have an insolvency issue sometime later this year, if the bond holders don't take their current deal now. In other words, it's playing chicken with its bond holders, saying take what its offering now; or there might be a Chapter 11 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. What kind of a deal is iHeart offering lenders? The details of the term loan tradeoff are not provided, but 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% and pay 88 cents on the dollar; while mid-level participation would result in a 17% discounting paying 83 cents on the dollar; and high participating would gain the company a 25% discount, paying 75 cents on the dollar.
But when none were submitted, it extended the offer to April 14, and then extended it again to April 21. Along the way, its offer was sweetened to the point where it promised to pay 90 cents on the dollar for both low and mid-level participation. Again, bond holders turned their nose up at the offer, collectively offering to tender only some $3 million in notes.
Today, the company extended the offer yet again to April 28. But instead of offering another sweeter, Bain and Tommy Lee switched from the carrot and brought out 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 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 billions 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. If its interest expense remains the same, with the $417 million in debt coming due, its total debt expense would total about 2.27 billion, which would swamp EBITDA.
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 gettin 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.