To the mounting list of media companies struggling with their balance sheets, you can now add Clear Channel (NYSE: CCU) Communications. The Wall Street Journal reported this morning that the radio operator has tapped $1.6 billion of a $2 billion credit facility in preparation for increased debt-interest payments (related to a possible breach of its covenants) and principal payments due on certain bonds in 2013. (Those bonds may be difficult to refinance if the credit markets remain turbulent for several years.)
According to the Journal, the news sent the company's debt tumbling to pennies on the dollar , as investors decided this was a sign that the company believed it would likely trip its covenants and have problems servicing its debt. Bonds due in 2013 were trading at $0.13, while bonds due in 2016 were trading just below $0.50.
The roots of Clear Channel's troubles go back a decade or so. Heavy consolidation in the radio industry in late 1990s and ealry 2000s was fueled by debt, in some cases high-yield debt, to capitalize on deregulation that enabled operators to own a lot more stations in local markets. Back in 2000, it wasn't uncommon for radio companies to be highly leveraged (at, say, seven or eight times EBITDA, or earnings before interest, taxes, depreciation and amortization, as revenue growth rates exceeded 20% for years. Then came years of stagnant growth in radio advertising, as both listeners and advertisers fled to other mediums, leaving many of the radio operators under a debt burden that could prove difficult to service. Add to this a buyout from private-equity firms Bain Capital and Thomas Lee Partners financed by more than $17 billion in debt, and the worst economic crisis in 70 years, and Clear Channel (NYSE:CCU) may have found itself in the perfect storm.
Clear Channel announced recently that it would slash 8% of its workforce to cut costs.
By Rory Maher