Clear Channel Burning Cash to Delay Reckoning: Corporate Finance

Clear Channel Communications Inc. is offering to double interest to push out maturities on some of the $4.3 billion it owes, just as the most-leveraged U.S. broadcaster suffers the first cash-flow deficit in four years.

The company said on Nov. 25 that it’s seeking to extend about $1.8 billion of borrowings due in 2016 by three years to five years, which Fitch Ratings estimates would boost interest costs as much as $55 million annually.

While the proposal gives Clear Channel more time to turn around a business that’s posted losses every year after Bain Capital Partners LLC and Thomas H. Lee Partners LP took control in 2008, it also raises the company’s risk of missing interest payments on $20.7 billion of debt, according to Moody’s Investors Service. After capital expenses, Clear Channel ran a deficit from operations in the year ended June, meaning the company had to eat into cash that’s declined more than 60 percent since the end of 2010 to $704.2 million.

“Refinancing at a higher rate is never a positive,” Scott Van den Bosch, a New York-based senior analyst at Moody’s, said in a telephone interview. “It’s not a cure-all, but it buys them time to improve the balance sheet.”

‘Mixed Bag’

The company’s $1.5 billion of 9 percent bonds due in December 2019 traded at 102.5 cents on the dollar to yield 8.3 percent, at 10:07 a.m., up from a low of 95.5 cents in August, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.

“The transaction is extremely positive for the company and that’s evident in the bonds, which have traded up,” Rich Bressler, president and chief financial officer at San Antonio-based Clear Channel said in a telephone interview. “What we’re looking to do is balance our maturities. The credit markets are very favorable now to borrowers and though it’s an increase in interest cost for the company, we can easily manage it.”

Clear Channel is seeking to extend $1 billion of loans to 2019 from 2016 and is proposing to pay interest of as much as 7.5 percentage points more than the London interbank offered rate, compared with 3.65 percentage points more than Libor on the existing debt, according to CreditSights Inc.

It’s also asking lenders to exchange $448.1 million of 10.75 percent notes and $340 million of 11 percent bonds expiring in 2016 for 14 percent debt due in 2021.

“These extensions are really a mixed bag in terms of credit quality, with the benefit of extending maturities offset by significantly higher interest costs,” Spencer Godfrey, an analyst at KDP Advisors Inc., wrote in a Nov. 26 report.

Clear Channel had a free cash-flow deficit of $69.4 million in the year ended June, according to data compiled by Bloomberg. On the trailing 12-month basis, the company burned cash for the first time since 2009, the data show.

Interest Expense

Its interest expense rose to $1.58 billion in the 12 months ended June 30, from $451.9 million in 2007, the year before its $17.9 billion takeover, Bloomberg data show.

Fitch estimates $50 million to $55 million of added interest costs after the transaction, which follows a loan extension and bond exchange in the second quarter that resulted in $165 million of additional interest expense, analysts led by Rolando Larrondo wrote in a Nov. 27 report.

“The current proposal does not come cheaply,” Karen Klapper, an analyst at debt research firm Creditsights Inc., wrote in a Nov. 27 report. The increased interest comes at the expense of what are already “strained cash flows.”

Moody’s rates the company Caa2, eight levels below investment grade and a mark reserved for companies with “very poor financial security” that present “elements of danger with regard to financial capacity.” Standard & Poor’s rates the company CCC+, one level higher.

Most Leveraged

Clear Channel’s interest expenses have surpassed its operating income in every quarter since the end of 2008, data compiled by Bloomberg show. Its earnings before interest, taxes, depreciation and amortization have shrunk to $1.8 billion in the 12 months ended June 30 from $2.3 billion in 2007.

“Ultimately, they need to grow Ebitda and generate free cash flow to repay debt to delever the balance sheet, which will increase the opportunities to sell assets to repay additional debt,” Moody’s analyst Van den Bosch said.

Its ratio of debt to Ebitda, or leverage, is 11.7 times, the most among U.S.-based broadcasters with at least $100 million of annual sales, Bloomberg data show.

Broadcast Business

About half of Clear Channel’s sales come from its 840 domestic radio stations that feature music and talk shows and its Premiere Networks syndication service with almost 5,000 affiliates, according to a Feb. 19 regulatory filing. The company also owns Clear Channel Outdoor Holdings Inc., which owns or leases more than 750,000 advertising displays worldwide, including billboards and street furniture.

“Its broadcast radio business is heavily sensitive to economic trends,” Moody’s Van den Bosch said. “During a downturn, advertisers are more likely to cut back on broadcast and the secular risks to broadcast radio are more likely to manifest themselves then.”

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