iHeartMedia Beyond Borrowed Time

3/15 Update: Today iHeartMedia filed for Chapter 11 bankruptcy protection, after coming to a deal with a viable cross-section of its creditors to wipe some $10 billion in debt off of its balance-sheets…leaving the “restructured” company with about $10 billion left to pay down. Some creditors, who hold eight to nine figures of this debt, will be wiped out, but it’s too early in the process to tell just who will get screwed the most. Just today, iHeart tendered nearly 20 filings with the U.S. Bankruptcy Court in Texas’ Southern District – and those to whom the company owes money, as well as other interested players looking to intervene, have filed another 70+, suggesting this process will not be smooth nor speedy. [Original post follows below.]
What a strange way to go bust. After spending years telling the public that all was well – consolidation, automation/syndication, and cost-cutting was “good for radio” and tens of billions of dollars of debt was of little to no concern – Clear Channel iHeartMedia is finally preparing to pay the piper.
On February 1, the nation’s largest radio broadcast conglomerate welshed on a $106 million dollar interest-payment, triggering a 30-day countdown to default. As the clock ran down, on March 1 the company also skipped an additional $138 million in interest-payments, all in the hopes of forcing its creditors to the table to hammer out a soft landing in Chapter 11 bankruptcy, similar to what Cumulus Media did late last year (though Cumulus was only in one-tenth the debt that iHeart is, and Cumulus’ reorg-timetable has also hit some snags).
In between skipping these payments, iHeart tendered a restructuring offer to its lenders that seeked to reduce the company’s total debt from nearly $21 billion to $5.5 billion, all of which would be expected to be repaid over five to seven years. In exchange, “senior lenders” would receive an 89.5% equity share in the company, including 100% ownership of Clear Channel Outdoor – the most healthy division in the iHeartMedia constellation, and the one that iHeart itself’s been drawing money from over the last few years in order to juggle its crippling debt. Bain Capital – the private-equity firm which more than doubled iHeart’s debt when it took the company private in 2008, setting it up on the crash-trajectory it faces now – would walk away with less than 2% of the restructured company.
Although negotiations continued throughout the month, they did not produce consensus. In late February, some creditors even went to New York State Supreme Court seeking a preemptive injunction that would place a lien on iHeart’s assets. They argue that the company promised them they would be treated “equitably and ratably” in any bankruptcy reorganization, but discovered late last year that iHeart had entered into covenants with other debt-holders that stand to diminish their own place in the line of institutions wanting to salvage something from iHeart’s bankruptcy.
iHeart’s first countdown to default officially ran out on Saturday, March 3. But – surprise – the weekend passed with no news. On Monday, March 5, iHeartMedia filed a statement with the Securities and Exchange Commission detailing a forbearance agreement it had hammered out with creditors over the weekend, which staved off the nuclear option (straight-up default)…until Wednesday, March 7.
Concurrently, the company released another restructuring proposal to its debt-holders, which upped the amount of “new debt” a post-bankrupt iHeart would carry as well as the equity-stake creditors would receive, and proposed a complete spin-off or sale of Clear Channel Outdoor. But nobody bought in, and with 11:59 PM approaching fast on the seventh, the company hammered out a second forbearance agreement with its creditors, pushing back default to 11:59 PM on Monday, March 12. That forbearance agreement was then extended twice, each time for just 24 hours.
As all of this was playing out, the company announced that its key executives would reap extra millions for being put through this sordid ordeal. CEO Bob Pittman stands to earn a “target bonus” of $2.3 million for every quarter of this year (or more than $9 million in bonus compensation); COO/CFO Rich Bressler can grab $1.3 million every quarter (or more than $5 million this year), while EVP/General Counsel Rob Walls could net $225,000 every quarter (or $900,000 for all of 2018).
While the executives stand to make out like bandits, iHeart had planned to announce that it would be cutting commissions to its advertising-sales staff, effective April 1 – but the Tom Taylor Now newsletter reports that the cutback has been postponed. All of this is a fairly standard, yet shameful, practice in contemporary corporate America, which operates by the maxim of privatizing profits while socializing losses to the greatest extent possible.
Moody’s Investors Service is not fooled by any of these shenanigans, declaring that iHeart has already gone into Limited Default, based on the fact that its debt is running at nearly 13 times its cash flow and the company is no longer solvent enough to service it.
All of this has the opportunistic vultures circling — the largest of which is Liberty Media, the majority owner of the Sirius/XM satellite radio system, which also has high stakes in the Pandora streaming music service and concert-promoter Live Nation (which, incidentally, was a division of Clear Channel from 2000-2005). Seeing obvious synergies that could create a music-delivery and promotions powerhouse, Liberty recently acquired some $400 million in iHeartMedia debt, effectively buying a seat at the bankruptcy-negotiation table. Some market-watchers also wonder if Pandora’s recently-annoucned plan to raise another $400 million via a new stock-offering is a ploy to generate new dollars with which Liberty Media can play in iHeart’s bankruptcy-pool.
Just days before iHeartMedia’s first default-countdown clock was to run out, Liberty formally proposed to take a 40% stake in iHeartMedia for the low, low investment of $1.16 billion — a cash-infusion that would let iHeart keep bankruptcy at bay in the short-term, but at a cumulative corporate valuation that’s just a bit more than half of what iHeart thinks it will be worth if it goes through the bankruptcy-restructuring process. Neither iHeart nor Liberty will comment on this proposal, but the New York Post was able to dig up an unnamed source which puts iHeart’s chances of actually ending up bankrupt at 98%, “who emphasized that it is not what he is hoping for,” for what that’s worth.
Oh, to be a fly on the wall in iHeartMedia’s San Antonio and New York offices this weekend! The company’s already kicked one impending default down the road twice in the last week, and the countdown-clock to a default on the other interest-payments it’s skipped runs out at the end of this month. Is this another case of too-big-to-failism in corporate America? What knock-on effects might iHeart’s convolutions have on finance capital’s larger relationship with the radio sector? (Borrowed) time will tell.