Billion-Dollar IHeart Hole May Spur Clear Channel Suitors

Clear Channel Outdoor Holdings Inc. may have to seek buyers for its assets after the bankruptcy of parent iHeartMedia Inc. blew a billion-dollar hole in Clear Channel’s balance sheet.

That’s the most likely path according to S&P Global Ratings, which recently downgraded Clear Channel’s debt after studying the refinancing risk tied to $2.2 billion of notes that come due in 2020. While Clear Channel wasn’t included in iHeart’s March bankruptcy filing, it’s owed more than $1 billion for cash that was stored and managed by the radio broadcaster. Clear Channel, which owns a network of advertising billboards, has said it expects to recover only a fraction of that sum.

Meanwhile, Clear Channel faces free operating cash flow deficits and high leverage, and iHeart’s reorganization will probably drag into early 2019, when the 2020 notes become current, S&P analysts Minesh Patel and Jeanne Shoesmith wrote in a June 26 report. They downgraded Clear Channel to CCC+ from B- previously. The solution is asset sales, they wrote, with JCDecaux SA, Lamar Media Corp. and Outfront Media Inc. “the natural strategic acquirers” of Clear Channel’s “valuable and hard to replicate” assets.

A representative for Lamar declined to comment, and the other two didn’t immediately respond to requests for comment. JCDecaux’s co-Chief Executive Officer Jean-Charles Decaux has repeatedly expressed interest in Clear Channel. A representative for iHeart declined to comment and Clear Channel didn’t respond to a message. Both are based in San Antonio, Texas, and share some senior executives.

Given iHeart’s plan to distribute its Clear Channel equity to creditors, worth about $1.7 billion, it’s unlikely that Clear Channel would pursue asset sales that would strip the company of value, said Philip Brendel, a Bloomberg Intelligence distressed-debt analyst.

“The refinancing risk is definitely higher, but I think it’s likely that senior creditors who are counting on the equity are going to take measures to make sure some sort of refinancing strategy is sewn up, possibly during the bankruptcy proceedings,” he said. It’s more likely that Clear Channel would wait until the iHeart bankruptcy is concluded and a new board is in place before pursuing asset sales, he said.

Clear Channel is a key part of iHeart’s plan to cut its debt load of more than $20 billion resulting from a decade-old leveraged buyout. IHeart has rejected Liberty Media’s bid for some of the broadcaster’s assets because it didn’t offer enough value to creditors.

Debt Math

While prices on some of iHeart’s notes have plunged below 15 cents on the dollar, Clear Channel’s bonds hover near or above par, and the shares have held their ground this year. It’s carrying more than $5 billion of debt, according to its March 31 quarterly filing.

But Clear Channel’s leverage stands at more than 9 times earnings and it needs to recapitalize to make itself sustainable in the long term, S&P said. It’s unlikely that the new owners of Clear Channel will contribute a significant amount of new equity given the “inherent limitations” of bond investors to hold or contribute new equity capital, the analysts wrote.

Clear Channel Treasurer Brian Coleman said on the company’s most recent earnings call that management would be thinking about how to address the 2020 notes in light of the proposed separation of the company in the iHeart bankruptcy plan.

“It’s on our radar screen, but if we did anything we’d have to make sure that it made sense and didn’t disrupt anything else we were thinking about,” he said.

It doesn’t make sense for Clear Channel to sell assets until there is a better sense of what it looks like as an independent entity from iHeart, James Goss, an equity analyst at Barrington Research Associates, said by phone.

“It might provide a near-term benefit, but maybe that doesn’t help with the growth potential and the platform they can work from in the future,” he said. Clear Channel has growth potential in its digital displays business that would be beneficial to hang onto as an independent company, he said.

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