• by Erik Sass , June 8, 2009

The saga of the Clear Channel buyout, which has been characterized by a series of sudden reversals and unexpected twists, took another surprising turn this week with a report that leading lenders who facilitated the deal may deliberately force the company into default, as a stratagem to take control of its equity.

According to the Financial Times, which first reported the news, the financiers might be able to accomplish this by refusing to agree to a debt swap with Clear Channel Media Holdings, the company created by private equity firms to take Clear Channel Communications private.

The parent company of Clear Channel Radio and Clear Channel Outdoor was acquired last year by Thomas H. Lee Partners and Bain Capital Partners for $23.8 billion, most of which was borrowed from Apollo Management, Blackstone's GSO, Centerbridge Partners, OakTree Capital and Wall Street. Even in the best of times, this was considered an ambitious loan. Since then, however, the economic downturn and long-term decline in radio ad revenues have significantly raised the chances of default.

Like other media companies, Clear Channel Media Holdings believed it had some room to maneuver, assuring stakeholders it could always rejigger loan agreements with the consent of lenders. Squeezed by a steep decline in ad revenues and simultaneous credit crunch, CC proposed trading parent company debt (that is, its own debt) currently held by the lenders for a $2.5 billion debt owed to it by Clear Channel Outdoor, the company's most successful division and thus a less risky debtor.

Now, however, it seems the banks may be more interested in taking possession of CC's equity at a substantial discount than securing less risky loans. This could happen if CC violates the conditions of its lending covenants, which require the company to maintain a certain proportion of cash flow to debt. This situation seems increasingly likely as radio and outdoor revenues continue their downward trend.

Providing the opposing view, the new boss of Clear Channel's international business, William Eccleshare, told the Financial Times he was confident the company would be able to reach an agreement with lenders that would allow it to avoid default. Eccleshare also denied rumors that Clear Channel might sell its outdoor division, which includes many overseas holdings, as a way of averting default.

This isn't the first finance falling out resulting from the Clear Channel deal, which was funded in large part by a six-bank consortium including Citigroup, Credit Suisse, Morgan Stanley, Deutsche Bank, the Royal Bank of Scotland, and Wachovia. 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 July 2008 with an agreement that lowered the price from $39.20 to $36 per share.