• by Erik Sass  @eriksass1, May 4, 2009

With rumors circulating that Clear Channel Media Holdings could default on its debt, the radio division of the media giant cut about 960 employees last week - significantly more than the 590 originally reported. In an ominous move, Clear Channel Radio also told employees to stop using ratings provided by Arbitron, the sales currency for radio transactions, because it has not renewed is contract with the radio ratings firm, citing disagreement over the cost.

The full magnitude of the layoffs only became apparent later in the week, bringing the total number of Clear Channel Media Holdings employees laid off since January to about 2,810; approximately 1,850 employees were laid off on Jan. 20 by Clear Channel Radio and Clear Channel Outdoor, with about 1,500 cuts falling on the former and 350 on the latter. Thus Clear Channel Radio by itself has laid off about 2,460 employees this year, equaling 12% of the radio workforce. Last week's layoffs included a good number of on-air employees, with drive-time and mid-day music hosts getting the axe in Columbus, Dayton, Denver, Indianapolis, and Phoenix.

Reeling from the drop in advertising spending that is pummeling the rest of the radio business, Clear Channel Radio took the extraordinary step of telling employees not to use ratings from Arbitron to sell advertising. In a memo to employees, chief financial officer Mitch Goldstein revealed that "we do not have a deal with Arbitron for 2009 and beyond," meaning Clear Channel employees can't use Arbitron ratings, the currency for radio ad sales.

Clear Channel and Arbitron have squabbled over the cost of radio ratings for years, and their long-standing dispute reached new levels of acrimony and publicity during the roll-out of Arbitron's Portable People Meter, a passive electronic measurement device meant to replace its traditional paper diary ratings in the big American markets. While Arbitron campaigned to get PPM accepted as the new currency for radio transactions, Clear Channel Radio led an industry council of other PPM skeptics to consider alternative approached to electronic measurement. Both sides have sniped at each other with ads in trade magazines, with the radio companies criticizing PPM on technical grounds but also cost; according to reports from several years ago, Arbitron originally demanded a premium of almost 60% over paper diary ratings fees.

Given this history, Clear Channel Radio is probably using its well-publicized financial distress to negotiate for a lower fee; however, until they reach a new agreement, radio ad sales will have to be conducted ad lib, perhaps by reusing last year's contracts for the equivalent time period (with discounts reflecting the down economy). Clear Channel made a deal with Nielsen in November for radio ratings from an electronic device in smaller and mid-sized markets, but Nielsen's system isn't scheduled to go into operation until the third quarter of 2009.

In any event this time Clear Channel isn't bluffing, as its financial woes are quite real. Saddled with $22 billion of debt, including $15.7 billion from last year's deal to take the company private engineered by Thomas H. Lee Partners and Bain Capital Partners, Clear Channel Communications is at growing risk of default, according to the New York Times, which reported the story last week. Specifically the company runs the risk of technical default under the terms of covenants with lenders, which mandate it maintain a ratio of EBITDA to secured debt no greater than 9.5-to-1. However, given current rates of decline that outcome looks increasingly unlikely. With secured debt of about $14 billion at the beginning of the year, CC's trailing twelve-month EBITDA can't fall below roughly $1.47 billion. Meanwhile, in the first quarter of 2009 total revenues declined 23% compared to last year; supposing EBITDA also declines over 2009 at an average pace of 23%, at year's end it would amount to about $1.39 billion. And in fact, EBITDA may decrease at a much faster pace, as year-over-year declines have been accelerating: over the four quarters of 2008, EBITDA fell 7%, 2%, 14%, and 49% respectively.

In this situation other big radio and newspaper companies have sometimes handed over a piece of the company to banks to forestall a declaration of default; however Clear Channel would have a hard time doing this, as relations with the six-bank consortium (Citigroup, Credit Suisse, Morgan Stanley, Deutsche Bank, the Royal Bank of Scotland, and Wachovia) were poisoned by a court battle last year over the terms of funding for the $20 billion buyout. In March 2008, the banks got cold feet about the cost of the buyout and tried to derail the deal with last-minute provisions they knew would be unacceptable to Clear Channel and its private equity buyers. Clear Channel and the buyers sued for breach of contract and tortious interference; the case was settled out of court in May with an agreement that lowered the price from $39.20 to $36 per share.