Clear Channel's Financial Comeuppance

My Italian father, God bless his soul, never knew how much money he had saved in his life even on the day he died.

That's because he did two things extremely well -- save money from his paycheck every week (he was a career military man and then designed catapults for Navy aircraft carriers).

And he paid everything off.

In other words when he bought something, he started paying the debt down immediately and for as long as it took until there was no debt. He died debt free which I know pleased him.

I have tried to learn the same lessons from my dad. Pay off everything you buy and save money. When I got my big Clear Channel settlement, I didn't buy a Ferrari or take a trip around the world. I paid off my mortgage and outstanding expenses. I think my dad would be proud.

You may be like me in your lives but we often forget that today's equity owners of major corporations don't see a virtue in paying anything off.

They want debt.

They leverage debt to buy more.

They pay whatever the best interest rates are and finance that debt over and over again.

But now there's one little problem.

Many of radio's major consolidators have hit the wall. They purchased radio stations and companies during the deregulation boom with fast and easy money. Bought their stations at multiples that were too high then to adequately handle their debt service now.

Somewhere between 1996 and the recession a few years back, they were forced to finance and refinance that debt to stay within loan covenants often at rates that were unfavorable.

When the economy fell apart and radio advertising began to suffer as a result, some radio groups couldn't make their loan payments thus the prepackaged bankruptcies we are seeing and the draconian cutbacks to stay afloat.

I've said all along that we can look with fascination at Citadel's problems and Regent and all the other financially ailing radio groups but the one we should pray for is Clear Channel. Radio doesn't need its market leader stumbling.

Earlier this year I got a kick out of how the cheerleaders on Wall Street were issuing such optimistic forecasts about Clear Channel under equity owners Thomas Lee Partners and Bain Capital.

While I very much admire the broadcasters, managers and sales professionals at Clear Channel, I am not as impressed with their top management.

And one nagging thought when I heard Wall Street analysts waxing eloquent about Clear Channel being out of the woods was -- what about all that expensive debt including the most recent financing at awful interest rates?

So I was not surprised to see an excellent New York Post article that accurately described the real peril ahead for radio's number one group owner and number one borrower.

The piece said if Clear Channel cannot restructure its debt within the next few years, it will likely collapse according to sources The Post interviewed.

But, get this.

The article says that's exactly what Clear Channel creditors want!

Do I believe it?

Hell yes!

Clear Channel has had no success in renegotiating its debt and The Post reports no current discussions going on.

Clear Channel could plod along for a few more years but eventually the debt issue will have to be solved.

Investment banks look for increased revenue along with better interest rates with which to finance existing debt to keep moving forward. I'm sure Lee and Bain have that thought in mind.

But there are extenuating circumstances now.

Radio advertising will come back, no doubt and costs will continue to be cut even at the expense of quality local programming but radio will never again be a growth business without entering the mobile Internet market as a separate and apart co-business.

Read that again.

Separate and apart co-business.

Not an add-on to existing broadcast operations.

Not non-traditional revenue to bolster sagging radio revenue.

And both fit well into the same media company because of terrestrial radio's secret weapon -- its talent and experience making content.

Clear Channel spends spit on mobile Internet -- not even 3% of its annual operating budget even though I'm saying without mobile interactive, the revenue will not be there to pay strangling debt.

Lee and Bain should have walked from the $24 billion leveraged buyout of Clear Channel that made the Mays family rich once again back in 2008. The banks even balked. I was surprised that Lee and Bain went through with the buyout.

Bad move.

If Clear Channel cannot come up with better financing terms, it will default on the $18 billion or so of debt that equity partners bought.

Here's how The Post sums up Lee and Bain's dilemma:

"The market for refinancing loans is hotter than at any time since the recession, but that's not helping Clear Channel, whose large creditors -- Centerbridge Partners and OakTree Capital Management -- are not passive LBO lenders. Centerbridge co-founder Mark Gallogly is formerly a Blackstone Group managing director who cut his teeth buying media companies, and OakTree last week repossessed radio company Regent Communications. Both want to own Clear Channel and are prepared to wait, the first source said".

The tactics are classic. The Evil Empire is now on the receiving side of bullying.

Lenders threatening lawsuits like Clear Channel used to do to almost everybody who got in their way.

A threatened lawsuit if Clear Channel borrowed from Peter (Clear Channel Outdoor) to pay Paul (Clear Channel's huge debt). Outdoor being the business throwing off more free cash flow so using that company to raise new debt made sense to them.

Clear Channel finagling the payback schedule to avoid default any time soon but not avoiding harm's way in the next few years. This debt is going to be an albatross around Clear Channel's neck between now and then.

Here's the math from The Post:

Clear Channel generates $1.4 billion in annual cash flow.

Pays $1 billion in interest (that's right billion in interest!).

Spends $200 million on capital expenditures.

Leaving only $200 million in free cash flow.

$700 million comes due in May of next year.

$4.5 billion in July, 2014.

With $2 billion of cash in the bank, Clear Channel will likely squeak past the 2011 loan payment but there's no money to repay the debt that is due by 2014.

Unless, of course, they go back to the trough and refinance their debt again at God knows what rates.

And that's how it is in the glamorous world of radio consolidation. Live from paycheck to paycheck.

My dad wouldn't do it.

You and I don't want to do it if possible.

And the reason why I often say radio has a competitive disadvantage to come back and mount an attack in terrestrial radio and mobile Internet as two separate and apart businesses is not the talented people who manage, sell, program and run Clear Channel stations.

But the irresponsible top management that can run but cannot hide after July, 2014.

It's that serious.

It's that sad for those of us who love and work in radio -- a great source of cash flow for terrestrial radio if it didn't have so much debt.

And with debt being the focus, companies like Clear Channel can't afford to invest in the mobile Internet even though it is the future of content distribution.

I hope this helps to put things in perspective a little bit. I wanted you to get an idea of what drives my thinking about the prospects for traditional media going forward.

To put it in street terms, the bill collector is coming and if Clear Channel (and others) don't have the money, they are going to have to seek out a loan shark.

That would be -- a lender on Wall Street who is offering high interest rates to allow desperate companies more time to sell assets, make more fees and do mergers that generate -- you guessed it -- more debt.

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