Wells Fargo Securities high yield debt analysts Bishop Cheen and Davis Hebert have begun coverage of CC Media Holdings and its Clear Channel Communications subsidiary. And while the company is carrying a huge debt load, they think there is some value to be found for investors on the debt side.
“We are initiating coverage on the secured debt of CC Media Holdings and its subsidiary Clear Channel Communications, Inc. Despite a wall of secured debt maturities looming in 2014, we think there is ample cushion at current levels in the bank debt and inherent asset value that would allow for a par recovery of the assets,” the analysts wrote.
Here’s a bit of their reasoning:
“Asset value. The term debt is marked at 79, leaving a 21% cushion that we think reflects caution asset valuation. Our math: $1.43 billion real EBITDA (not higher covenant EBITDA blessed with add backs) at 8x liquidation value equals $11.456 billion, or 82% coverage of the holding company’s $13.991 billion of secured debt.”
While the analysts expect free cash flow to be modest, around $109 million this year, they see that improving in the years ahead as the ad recovery boosts cash flow at Clear Channel Radio and Clear Channel Outdoor. That additional free cash flow could allow the company to reduce debt.
“Bond Outlook — Hold short-dated maturities, sell longer-dated paper on strength,” was the headline for their advice to clients.
“Against all odds, CCMO has managed to redo its balance sheet and buy time. Clearly, a resurging bond market from its distressed nadir of one year ago has helped CCMO monetize its CCO credit after failing to in two prior attempts last year. For faithful holders of CCMO’s debt complex, patience has paid off handsomely with some levels literally tripling in price during the past 15 months. Hindsight is bliss, but, currently, we think more upside ahead is already priced into CCMO’s various debt issues due to an inherent set of negative and uncertain factors — earnings, sustainability of growth, structural complexity and a relative lack of transparency compared to other publicly traded media companies. We are reiterating our bifurcated recommendation on the bond complex of CC Media Holdings Inc., the parent of intermediate holding company Clear Channel Communications (CCU) and its 89% owned subsidiary Clear Channel Outdoor Holdings Inc. (CCO),” Cheen and Hebert advised.
Here are their ratings:
-Market Perform on CCMO’s 2010 through 2012 bond maturities;
-Market Perform on CCO’s two 9.25% senior notes of 2017 (see our separate CCO analysis);
-Underperform on CCMO’s 2013 and beyond bond maturities.
RBR-TVBR observation: “Against all odds” is right and Clear Channel’s private equity owners and management have succeeded in some amazing maneuvers to frustrate the vulture capital firms that thought they could force the company into Chapter 11 and pick up its assets on the cheap. The fight isn’t over, but the company has bought quite a bit of time to rebuild asset value as the recovery progresses.
