iHeartMedia Wins Court Fight With Dissident NoteholdersLaurel Brubaker Calkins and Rebecca Spalding
Lenders claimed $500 million asset-shift not allowed
Dispute threatened to undermine company finances, IHeart said
IHeartMedia Inc. won its fight against a group of senior lenders who were threatening to tip the media giant into bankruptcy unless the company rolled back a $500 million asset shift.
A judge in San Antonio, Texas, ruled Tuesday that iHeart was within its rights to transfer shares of its outdoor advertising unit beyond the creditors’ reach. The judge agreed with iHeart’s claim the move was designed to boost profitability by letting it buy back a chunk of its debt at a discount.
“IHeart is not in default” and didn’t violate the terms of its loan covenants, Texas State Judge Cathleen Stryker said in the four-page ruling. She issued an order permanently blocking the dissident lenders, or anyone acting with or for them, from “issuing or threatening to issue” default notices or accelerating iHeart’s debt because of the stock reallocation.
More than a dozen creditors, including multiple hedge funds, were poised to issue notices of default on at least 25 percent of the outstanding principal of four priority guarantee notes at the company, formerly known as Clear Channel Communications. The senior lenders complained that San Antonio-based iHeart violated its debt covenants by moving 100 million shares of Clear Channel Outdoor Holdings into a subsidiary that’s not obligated to repay the debt.
Scott Fletcher, one of the lawyers for the dissident lenders during the San Antonio trial, declined to comment on the ruling.
IHeart shares rose 43 percent at 4 p.m. in New York. They had surged as much as 61 percent following the ruling.
“We believe this clears an important hurdle and expect the company to aggressively address its capital structure in 2016,” David Phipps, a Citigroup Global Markets Inc. research analyst, said in a note to investors. “We think some form of bond tender offer and/or debt exchange announcement could occur near-term.”
The ruling will benefit iHeart’s junior lenders, Phipps said.
The default notices might have caused a cascade of additional debt repayment obligations, potentially threatening the company’s financial viability, iHeart lawyers argued in court. The company said it hopes to use the transferred shares to buy back debt while its stock is trading at relative lows.
The dispute echoes a clash between gambling giant Caesars Entertainment Corp. and bondholders of its main operating unit. Months before the operating unit went bankrupt in 2015, middle-tier bondholders sued Caesars, claiming the company moved assets beyond their reach, reneged on a debt guarantee and took other actions designed to benefit shareholders at the expense of creditors.
Caesars claimed the moves were designed to save the unit from bankruptcy. They didn’t work. The unit filed bankruptcy in January 2015, and Caesars now faces five lawsuits backed by noteholders owed $11 billion. A court-appointed examiner found creditors have a “reasonable to strong” chance of proving the company intentionally defrauded them.
IHeart faces payment deadlines during the next three years on almost $10 billion of debt, originally amassed during its 2008 acquisition by the private equity firms Bain Capital Partners and Thomas H. Lee Partners LP. That $24 billion deal came to symbolize the excesses of the pre-crisis buyout boom.
Since then, the U.S. music business has become increasingly competitive as Pandora Media Inc., Spotify Ltd. and Apple Inc. have lured away millions of listeners with online radio and on-demand downloads.
The broadcaster must repay $193 million in notes maturing this year, $230 million under a revolving credit line that’s due in 2017, more than $1 billion in obligations maturing in 2018, and $8.3 billion in bonds and terms loans due in 2019, according to data compiled by Bloomberg.
“We will continue to evaluate opportunities to strengthen our balance sheet,” the company said in a statement following the ruling.
IHeart insisted it hasn’t missed any debt payments and has fully complied with all loan terms. The company claimed the asset transfer was specifically permitted under “carefully negotiated” loan covenants designed to allow flexibility in financing.
“We look forward to constructive discussions with our lenders as we continue to position iHeartMedia for long-term growth,” the company said.
IHeart contends the dissident noteholders threatened to issue default notices to renegotiate better terms at the expense of other creditors. At least one of these debtholders, an affiliate of Elliott Management Corp., had also purchased credit default swaps that could yield millions of dollars of profits if iHeart balked on the notes, the company said in court filings.
In March, iHeart won a court order temporarily blocking the lenders from declaring defaults until Stryker fully weighed the issues at trial, which began May 16.
The case is iHeartCommunications Inc. v. Benefit Street Partners LLC, 2016 CI 04006, District court of Bexar County, Texas (San Antonio).
(An earlier version of this story was corrected to say iHeart won its lawsuit.)