iHeart Media’s “Momma Ain’t Happy”

You know what they say, “If Momma ain’t happy, ain’t nobody happy.”  Generally speaking this phrase, from America’s south, means a “family” looks to Momma to keep it organized and functioning. If someone gets out of line, Momma will not be pleased.

For iHeart Media, two of their “Momma’s” are investment bank Goldman Sachs and a hedge fund called Canyon Capital Advisors.  Etiquette demands Southerners politely say, “Momma ain’t happy.”  Those of us from the Northeast just toss in a few douche bags and crudely say, “Momma’s f***ing pissed.”

The New York Post reports Goldman Sachs and Canyon Capital want some of their money back or else.  That “or else” is a possible court date and a forced corporate restructuring.

A few weeks ago you may have read about problems in so-called “high yield” bond funds.  “High yield” is Wall Street’s 2015 politically correct way of saying garbage.  Twenty years ago or more similar bonds were called “junk bonds.”  Today, they’re called “high yield bonds.”  “Junk” verses “high yield.”  Which would you like to invest in?

It appears problems in the “high yield” bond market may have made Momma a little queasy.

With bonds higher interest rates or yield means higher risk to your money.

With bonds, you’re a lien holder and loan a company money for a specific length of time or term. You’re kind of like a bank holding a mortgage.  The company pays you interest each year and at the end of the term, if the company hasn’t gone broke, you get your original investment back.  For example, you loan a company $10,000 at 2% interest over 10 years.  Each year, the company pays you $200 in interest and at the end of 10 years you get your $10,000 back. Over that time you made $2000 on that $10,000.

“High yield” bond funds invest in clusters of these loans or bonds made to high risk companies.  These companies pay a higher interest rate to borrow money because they are a higher risk, meaning there’s a better chance they could “default.”

“Default” is finance industry happy speak for “Too bad and too sad.  They’re broke. They can’t pay you back.  You’re screwed and your money is probably gone.”

Conversely, having equity or stock means you own a piece of a company and as owner you can share in its success.  Let’s say you own a few shares of Procter and Gamble stock.  As an owner, P&G tosses a little taste of its revenues your way each quarter.  This is called a dividend.

It appears Momma (in this case Goldman Sachs and Canyon Capital) has found iHeart Media owns 90% of Clear Channel Outdoor and is getting a $196 million dividend payment from that company on January 4, 2016.

Reports say iHeart Media is scheduled to pay back $193 million in bonds in 2016 and that’s what they planned to do with the dividend money.  Here’s where Goldman Sachs and Canyon Capital come in. They, being senior bond holders, want that money.  The bond holders that are scheduled to receive payments in 2016 appear to be  junior bond holders.  As with any high school hierarchy, in business seniors come before juniors when paying off debts.  And that’s why Momma wants her money.  She’s a senior and wants her money before any juniors get theirs.  She wants it now, not later, as reportedly planned.  Momma probably feels there’s a chance no money will be left in the checking account at some point and rules in life and in bankruptcy court dictate seniors get theirs first.  Juniors get what’s left.

A lot press has been devoted to the possible bankruptcy or restructuring  of companies like iHeart and Cumulus Media. iHeart Media, with a debt of $20.5 billion dollars, owes more to lien holders than the radio industry’s total annual revenues combined.  Yes.  You read that correctly.

As a second or junior lender recently opined, “In our view, it’s clearly not a sustainable capital structure.”  

Thank you Captain Obvious!

There is a difference in restructuring and bankruptcy.  In fact, if you’re an employee restructuring may actually be a good thing.

Bankruptcy is expensive and for a company with $20.5 billion in debts, lawyers will be like pack of famished wolves feasting on a fresh buffalo kill; savages feeding until the bones are pick clean and dry of every billable legal fee dollar.

In bankruptcy, there are numerous other legal issues to deal with too, the least of which for lawyers may end up being the most important for you – employment contracts.  Will it be honored in bankruptcy? How will severance be handled?  How will non-competes be enforced or not enforced? Bankruptcy lawyers will gorge and purge themselves many times before worrying about your rent and car payment.

Debt restructuring, on the other hand, allows a company facing cash flow problems to reduce and renegotiate its debts so they could keep more money in the checking account and continue operating. Granted, it takes all lien holders to agree on something like this, which in itself is quite the feat. It results in lower interest being paid out to lien holders and extending bond terms farther out into the future.  It’s said iHeart Media pays well into the nine figures annually in interest on just a portion of the total debt it owes.  This so-called unsecured debt, money loaned with no collateral just the promise to pay it back, comes with very high interest.

Early in December it was reported iHeart Media was already trying to get people they owed money to, to swap debt for equity.  This means give stock or ownership in the company in exchange for the bonds owed.  The benefit is annual interest payments are lowered, freeing up needed cash to operate. The bad news if you own stock in a company that does this, that stock becomes diluted and may be worth less in the future.

As 2015 comes to an end, 2016 will be another pivotal year for everyone in the radio industry. You may not work for iHeart or Cumulus Media, but a date with a bankruptcy judge or a corporate restructuring for either of these companies in 2016 will affect the entire radio industry for many years to come.  And that may not be a bad thing.  It could be exactly what this industry needs – a clean balance sheet and a fresh start.