Moody's Investors Service has slashed Bain Capital- and TH Lee-owned Clear Channel Communications' debt to junk status and is warning of a possible default in the next few months.
Although it has been the largest US company by revenue in the radio and outdoor advertising sectors, the company has struggled with its debt load after being purchased last July by the two private equity firms for $17.9 billion. At the time of the deal, TH Lee and Bain paid $36 per share for Clear Channel, while in August Apollo Global Management and Blackstone unit GSO Capital purchased $5 million in debt related to the deal.
Clear Channel’s revenues fell 13 percent to $99.4 million in the fourth quarter of 2008, in part due to a struggling advertising market. In dropping the company’s credit rating nine steps below investment grade to Caaa3, Moody’s said Clear Channel would likely violate its secured debt leverage covenants in 2009, which require it to stay at or under 9.5 times.
In the case of default, the company’s lenders, including Morgan Stanley, Citigroup, Credit Suisse and Wachovia Securities, could demand their money back and seize assets posted as collateral. Credit default swaps insuring Clear Channel’s debt against default are trading at 83 percent.
“With a capital structure that was highly speculative from its inception, the company’s ability to continue as a going concern is completely dependent upon remaining in compliance with its covenants,” Moody’s senior vice president Neil Begley said in a statement. “But in the current economic environment, compliance will be very challenging, and as a result such a capital structure will likely not be sustainable.”