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Ratings Firm Says Clear Channel is Stable...But


It was a very lengthy report from the ratings company Fitch as the company pointed out what it did and didn't like about the future of Clear Channel after the company announced plans to repackage some of its massive debt. Fitch views Clear Channel's offer to exchange up to $2 billion of term loans for new issue PGNs, as well as its concurrent pursuit of various amendments to its credit facilities, as material positives for the capital structure. However, the company also pointed out that any sudden downtown in the economy could be problematic and there is a real possibility that the company can default.

Importantly, this transaction, in which Clear Channel pre-obtained the commitment of 46% of its cash flow credit facility holders, demonstrates that a significant portion of Clear Channel's lender base is willing to extend their commitments and work with the company. It has been Fitch's view that Clear Channel's ability to remain a going concern will require flexibility on the part of 2016 term-loan holders by way of maturity extension. The lenders would have to believe that any leeway would provide Clear Channel with the ability to improve its capital structure, not merely prolong the inevitable.

Fitch also views the amendments as a positive for Clear Channel in that they provide the company with incremental flexibility in managing the various parts of its capital structure (including term loans, legacy unsecured notes, and debt at CCWW). Fitch believes that in the event the company achieves these proposed amendments, it will substantially increase the probability that Clear Channel will be able to repay its $1.5 billion of maturities in 2014 ($1.1 billion term loan and $461 million legacy note), without a maturity extension. That said, with nearly $500 million of debt obligations now through year-end 2013, Clear Channel's cash position and free cash flow (FCF) do not provide the ability to organically repay the 2014 maturities. However, the amendment will enable a full 2014 refinancing.

While Clear Channel continues to chip away at the 2016 wall, $10 billion of maturities is still unmanageable without substantial further capital structure changes or extensions, given the company's limited free cash flow and high leverage. The ability to remain a going concern therefore depends on Clear Channel retaining access to the capital markets.

Clear Channel's ability to address its capital structure also hinges on a relatively benign macroeconomic environment. A severe downturn will quickly remove the refinancing alternatives provided by these amendments. The company's operations are tied to the overall advertising environment, and the largely fixed cost base can drive outsized EBITDA declines in a downturn. This would serve to increase leverage and reduce FCF, severely impeding the company's financial flexibility and negotiating position with its lenders.

In Fitch's view, there is a scenario where the company employs several, if not all, of its alternatives, including further dividends out of CCOH, further Clear Channel high-yield notes, further maturity extensions, small asset sales, market repayments, distressed debt exchanges (DDE), which enable it to avoid default. However, this scenario involves some fairly aggressive assumptions and several events going in the company's favor. Therefore, Fitch believes a default is a real possibility.

(10/16/2012 9:39:08 AM)
Sounds like a lot of banker-speak to say, "they are teetering on the edge of disaster and hoping for the best."

- Steve

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