Tuesday, Dec. 11, 2018, will be a very important day for iHeartMedia. On that date is the company’s plan confirmation hearing in a Houston U.S. Bankruptcy Court. If the plan gets judge Marvin Isgur‘s approval, a “new” iHeart will be born. But, what if that doesn’t happen?
It’s a possibility, says a senior legal analyst at financial research firm Debtwire.
For those following the day-to-day proceedings in iHeart’s quest to emerge from debtor-in-possession status, the name Wilmington Savings Fund Society has become a familiar one.
Doing business as WSFS Bank, it is the oldest locally managed bank headquartered in Delaware, offers banking and wealth management solutions. The latter attracted iHeart, as WSFS Bank is the indenture trustee for 6.875% senior notes due 2018 and 7.25% senior notes due 2027.
On Wednesday, it filed a plan objection, as did Norfolk County Retirement System. On Thursday, Sony Music Entertainment filed its own “limited” objection, calling the plan “ambiguous as to whether it would cut off or impair SME’s audit rights, or any other contractual rights.”
On Friday (11/30), iHeart received Isgur’s blessing to extend the period during which it can seek removal of actions pursuant to 28 U.S.C. -1452 and Bankruptcy Rule 9027 to February 7, 2019.
Amid all of this activity, it is Wilmington that has attracted the attention of Josh Friedman, Senior Legal Analyst at New York-based Debtwire. As trustee, WSFS Bank has butted heads with iHeart throughout its bankruptcy case, launching multiple adversary complaints.
Friedman took note as Debtwire focuses its coverage on the leveraged credit markets, with a specialized emphasis in the areas of distressed businesses and restructuring.
What is of concern to Friedman is the fight that WSFS Bank has put up, and how this could play out Dec. 11. In its filing, it said, “As the Court is aware, this will be a highly contested confirmation hearing.”
Friedman concurs. “When you have a case with significant litigation and creditors who are willing to go to the mat to fight, you can say everything is rosy but you still need to emerge,” he says. “You either reach a deal with your creditors or have a court-approved plan on the mat.”
Wilmington notes that, “[a]lthough the Legacy Trustee has made multiple offers to settle, the RSA constituencies have refused to authorize a single offer of comprehensive settlement. Instead, the RSA constituencies seem to have cynically adopted a “litigate first, negotiate later” approach to engagement with nearly half a billion dollars of unsecured funded debt.”
As such, Isgur “should not countenance such gamesmanship.”
A JUNIOR-SENIOR TUSSLE
The battle between iHeart’s junior creditors and senior creditors is not newsworthy. As Friedman notes, it is almost de rigeur in a bankruptcy case. That said, one will likely want to compare Cumulus Media‘s emergence from Chapter 11 bankruptcy protection to iHeart’s ongoing quest to do the same. Some may also be eyeing the battle between creditors at LBI Media, which voluntarily filed for Chapter 11 earlier this week.
Was Cumulus’ path to less debt and a reconstituted company smoother? Definitely, Friedman says, noting that Cumulus and iHeart have one big similarity in their unique quests to reduce some heavy debt obligations. For Cumulus, certain creditor issues emerged before it sought bankruptcy protection.
These “certain creditors” are junior creditors, who could be negatively impacted by a bankruptcy and who believe in the long-term value of the business and the industry. As Friedman has watched iHeart’s court proceedings transpire in Texas, he notes that the battle between junior and senior creditors “has dragged out for a lot longer period of time.”
Friedman continues, “Here, senior creditors are not willing to compromise with the legacy creditors.” Add to the mix a “much more complex” exit from bankruptcy than what was seen for Cumulus. “The debt load is just much bigger,” he says.
To lower iHeart’s massive $20 billion debt, it will shed all of its preexisting debt, while certain new debt will be distributed to creditors. Friedman estimates that this will put iHeart’s debt at around $5.5 billion — confirming comments made by iHeart Chairman/CEO Bob Pittman at Forecast 2019 earlier this month that iHeart was indeed on track to lower its debt even further than the expected $10 billion event attendees were anticipating would happen.
With Isgur also considering sizable bonus payments to iHeart’s top executives, the bigger consideration will likely be reaching as many deals as possible between the company and its creditors. As Friedman explains, the big goal in a bankruptcy case is “to help engender deals.”
He says, “Sitting in bankruptcy protection is expensive. An important part of this is that they have a vast majority of their creditors on board with this plan.”
This could include “cramming down” the plan on some grumpy creditors, which Friedman says happens all of the time.
But, what if WSFS Bank’s arguments sway Isgur to disapprove of the plan?
The company is left with two options — a plan to satisfy the legacy noteholder (WSFS Bank), and a redistribution of the values set for other people entangled in the financial pool.
Sometimes, Friedman says, judges can signal to lean in a certain direction. This could bring the parties to literally reaching a deal on the courthouse steps.
What can iHeart itself do? That may not be germain as of yet, since the battle is between noteholders.
“Here, iHeart may not care who gets what,” Friedman says. “They need to restructure. Who owns what percentage does not necessarily matter to iHeart, but the [priority noteholders] get first priority, and ultimately iHeart is fighting for its plan. These disagreements are really between the creditor constituencies.”
With legacy noteholders getting paid less than other noteholders, the fight could last all the way to December 11.
What should the iHeart employee who doesn’t understand legal proceedings tied to a multi-billion-dollar restructuring be concerned about at this time?
Friedman suggests managers tell their employees that debtholders are fighting amongst each other and that the biggest question is what will happen a week from Tuesday.
The best scenario is for the warring parties to say they are done with their battle, allowing iHeart to say it’s done with bankruptcy and formally become a “new” iHeart.
“When is going to emerge, and are there things that could mess it up?,” Friedman says in putting in layman’s terms what’s at stake for iHeart. “If things get messed up, how long does it get messed up for? Will it be very temporarily, and then a deal is reached?”
For WSFS Bank, this could very well happen, putting iHeart in a position to tweak its numbers in order to satisfy all, and escape as a leaner operator of radio stations in a marketplace it still dominates.