Clear Channel swap explained by Moody’s


It might seem like swapping debt owed by Clear Channel Communications for debt that subsidiary Clear Channel Outdoor owes to the parent is just shifting an IOU from one pocket to another of the same pair of pants. Not so. Analysis from Moody’s Investors Service explains why the anticipated move would help the parent stay in covenant compliance on its debt.

Not that Moody’s is optimistic about long-term prospects for Clear Channel. It still thinks the company’s high leverage is unsustainable, so the debt swap would only delay a financial crisis.

Here is the commentary:

Moody’s says that a successful Clear Channel Outdoor refinancing would reduce likelihood of CC Media covenant breach

Moody’s Investors Service said that Clear Channel Outdoor Inc.’s (CCO) potential plan to refinance its $2.5 billion intercompany loan to its parent CC Media (Clear Channel) (89% owned by Clear Channel and 11% owned by the public), could avert moderate liquidity concerns within CCO as the loan matures in 2010, but more importantly, if the market refinancing is completed and repayment of the intercompany debt occurs, it would essentially remove the possibility of a near term bank facility covenant breach at Clear Channel. Clear Channel would only need to hold the cash proceeds to avert such a breach as the covenant is a net secured debt (secured debt minus cash on hand) covenant.

Alternatively if the company were to exchange intercompany debt for parent secured debt that would also alleviate covenant breach pressure. Under the refinancing scenario, if the cash is used to repay debt below par, credit metrics and room under the covenant could gain even more headroom, though there is a strong likelihood that such transactions would still be tantamount to a default or distressed exchange given Moody’s view that the company’s capital structure is unsustainable.

“Even if the company can clear its bank covenant hurdle through next year, as maturities mount in 2011 and beyond, repayment or refinancing given the company’s leverage levels, even with an economic recovery, is unlikely,” stated Neil Begley, a Senior Vice President at Moody’s Investors Service.

RBR/TVBR observation:
If nothing else, the folks running Clear Channel are adept at maneuvering in the financial markets. The vultures may be eying the radio giant, but this debt swap will likely get done and give Clear Channel some breathing room on covenant compliance – perhaps all the way into 2011.

As reported by the Financial Times, it appears Bain Capital and Thomas H. Lee Partners, the principal owners of Clear Channel, hold enough of the parent company debt to do the swap themselves. To the extent they can get any other debt holders to do the swap (or find buyers for new CC Outdoor debt), they would have that much dry powder left for future financial maneuvering.