iHeartMedia, the debt-burdened radio conglomerate, bowed to the inevitable late on Wednesday (March 14) and filed for Chapter 11 bankruptcy protection.
In a statement, the company said it had reached an agreement with the holders of more than $10 billion of its debt.
“The agreement we announced today is a significant accomplishment, as it allows us to definitively address the more than $20 billion in debt that has burdened our capital structure,” CEO Bob Pittman said in a statement. “Achieving a capital structure that finally matches our impressive operating business will further enhance iHeartMedia’s position as America’s #1 audio company.”
iHeart, formerly known as Clear Channel, is the nation’s largest radio company, with more than 850 stations. It also owns iHeartRadio’s music streaming service, a large concert business, and a 90% stake in Clear Channel Outdoor, the billboard company. Clear Channel Outdoor did not file for bankruptcy. For years, the company has been saddled with $20 billion in debt, the legacy of a leveraged buyout in 2008.
“What they’ve done to try to stay afloat is financial engineering,” says Seth Crystall, an analyst at Debtwire. “There’s no reason to file for bankruptcy until you have to… but we’re at that point.”
Among the music companies listed as creditors on the iHeart docket are Nielsen (owed $20 million); SoundExchange ($6.4 million); Warner Music Group ($3.9 million); Universal Music Group ($1.3 million); and Spotify ($2.1 million). Performance rights organizations ASCAP and BMI are each owed slightly over $1.4 million while Global Music Rights is looking at a $2 million debt.
While dramatic, the filing is not likely to have much noticeable effect on the company’s day-to-day. “They’re not shutting down. They’re going to pay their bills,” Crystall says. “If you were listening to iHeartRadio, or going to iHeart concerts, you will not even know the difference.”
The company, owned by Thomas H. Lee Partners and Bain Capital, has been in negotiations for nearly a year with its primary debtholders, led by Franklin Resources Group. Under the agreement detailed in an SEC filing, the debtholders will take control of more than 91 percent of the equity in the reorganized company, while Bain and Thomas H. Lee will keep just 1 percent. In term sheets released previously, the equity holders had offered creditors 89.5 percent of the equity, and proposed to keep 5.25 percent of the company. The creditors’ counteroffer sought a higher stake in the company — 94.75 percent — while offering the equity holders nothing.
According to the bankruptcy filing, the holders of $190 million in legacy debt refused to consent to the proposed reorganization. That could complicate the bankruptcy process, as the holdouts seek a better deal.
On Feb. 1, iHeart announced that it had skipped a $106 million coupon payment on debt that matures in 2021. That set up a 30-day “grace period” before triggering a default, which forced the company to declare bankruptcy.
Late last month, John Malone’s Liberty Media made a last-minute offer to take a 40 percent stake in the reorganized company for $1.1 billion. Liberty owns a majority stake in Sirius XM, and also has a sizable stake in Pandora, creating the possibility of synergies between the companies. The offer struck observers as a lowball price, and it came too late to avert bankruptcy, but Liberty may yet play a role in ongoing talks with the creditor group.
The radio business has struggled with flat advertising revenues over the last decade, as ad dollars have migrated to Google and Facebook. iHeart has sought to diversify its business with its digital offerings and its concert business. Once it emerges from bankruptcy, analysts say it has a chance to use its substantial cash flow to reinvest in the business, rather than make exorbitant interest payments.