Clear Incentives

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Let us set the Way Back Machine to May of last year, shall we?
Bain Capital and Thomas H. Lee Partners sweeten their offer for Clear Channel Communications to $39.20 per share. Clear Channel's board, which had been rather iffy, backed the offer the next day, setting the stage for a $19.5 billion dollar buyout with CitiGroup, Morgan Stanley, Credit Suisse, Royal Bank of Scotland, Deutsche Bank and Wachovia pitching in to provide at least $17.5 billion in debt to fund the transaction. Of this, some $12.6 billion would be lent at 300 or so basis points over LIBOR (or something south of 6.0% today), with the remainder at a spattering of different arrangements and rates. It seems clear that most of the instruments were to have seven year maturities. Clear Channel today, is looking at about $1 billion in interest payments against over $2 billion in EBITDA on such a deal. Not bad considering not too many months ago that interest would have been more like $1.5 billion.
Back "in the day," (say, November of 2006) the banks were so anxious for the opportunity to do the deal, they cut very "covenant light" terms in order to participate (and claim almost $500 million in advisory fees).
Alas, by February, things were looking bad. The collapse in credit meant that, if they could sell it at all, the banks would have to take a 15-20% haircut on the debt. That looks suspiciously like $2.5-$3.0 billion in losses. And you can imagine how eager the banks are to hold any leverage on their books in the post-Bear world.


Bain and Thomas H. Lee, meanwhile, are subject to $500 - $600 million in breakup fees if the buyout falls apart. They are also, likely, contractually bound to exert "reasonable efforts" to close the transaction. No foot dragging, folks.
Clear Channel is trading at around $28.25, making them badly anxious to close at $39.20.
Clearly, the banks have not been as anxious to close. To hear Bain and THL tell it, the banks started dragging their feet early on. Most recently, they claim, the banks have insisted on pressing terms that would make the entire transaction economically unsound. (Specifically, moving the 7 year term of the loans to 3 years). Before that, Citi threatened, it is claimed, to pull out of the Bain-3M transaction, citing the Clear Channel terms.
So Bain and THL sued.
You might think that Bain and THL would prefer not to close, weak economy, adverse conditions and all, and some writers have been tempted to attribute the lawsuits (one in New York, one in Texas) to simple tactics by the private equity partnerships to avoid being sued by Clear Channel for failing to exert "reasonable efforts" to close the deal. This is hard to figure, I think.
There are some 50 LBO deals sitting on the sidelines waiting to get done. Billions of dollars in equity investment are idle, pulling returns down and irritating limited partners. Even today at $39.20, Clear Channel looks like a rather lucrative deal for the sponsors. Plus, ignored by many commentators, breakup fees that private equity firms pay are often offset against the jealously guarded management fees the funds are used to. Limited Partners are not going to get stuck with that bill, I suspect. General partners, then, want to close the deal. Now.
The banks look to have a pretty weak case, on top of it all. So why press it? Obviously, they are not the most popular entities in the marketplace today. The arguments they make against funding the deal (as their commitment letter would seem to commit them to) require some awfully tortured linguistic treatment, and a Federal Judge just tossed one of the cases out of Federal court and back to Texas (Clear Channel's Home turf). What are they thinking?
Paulson.
Stall, let a recovery in the debt markets mature post-Bear, and maybe they only have to sell that debt at a 5% haircut (or at least not 20% in the immediate fallout of Bear). That delay could be worth $1.7 billion dollars, on top of whatever they might be able to negotiate out of the deal after another round at the table.
Risky? Sure, not to mention somewhat blind to the reputation loss they face now that litigation is in full swing. But banks aren't particularly reputed at present anyhow. Perhaps spending that capital now in return for a billion or so is worth it (to someone).

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