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.
Good to still see you out there.
Rich, How are you? Still around! Have a great 2016. Happy New Year! Darryl
Happy New Year as well. I was hoping you’d have up some podcasts. It would be good to hear you again. New media, as you have always said has a lot of power. If you vote for a school levy…….your…………………
It may not, indeed, be a bad thing, but just what the industry needs. Thanks, Darryl, for another well-written and informative piece.
Bob, thank you for the compliments and taking time to read the blog. Have a wonderful and safe New Year! Darryl
Rather than pondering debt, bonds, stock, and all problems the radio industry faces, lets begin with an important issue first. Will somebody get Darryl back on the radio? I don’t know how long it’s been but I’m still pissed off. All I want is my Saturday mornings back. Is that asking so much? My plan “A” has been to win Powerball and buy a radio station. Problem solved :>) ! So far, the plan has stalled…but I keep trying.
Len, Thank you for the very kind thoughts. I enjoyed spending time with you and all the listeners. Hopefully, someday. 🙂 Have a wonderful 2016. Happy New Years! Darryl
Not sure which I like better. You as Francis or you as Trump. Just tell it like it is.
You made me pause in my reading. “…may be worth less in the future.” or did you mean “worthless in the future”. Clean slate would be the best for your industry, but with sooo much money involved, someone or something will do their best to preserve their interest. Is there a Federal Reserve “play book” in play here? If so, what is the play? Move the debt to the public somehow.
Let’s say the bonds are swapped for US Treasuries. Would this be legal? Hard to say but what does that matter? Congress is on vacation (permanently). After all, a bond can be considered collateral and securitized. Do I know what I am talking about? No, but then again do I understand Quantitative Easing  where the Federal Reserve did something with $85 billion (with a “B”) a month (yes, each month) for a fairly long time. The key is doing this under the radar. Harder these days but then again, America elected Obama a second time. If done, the Federal Reserve would own iHeart debt. IHeart would pay the Fed. Yield would be lower but so what, the Fed’s balance sheet is in trillions, not billions. And if iHeart were to default on a payment or two? Again, so what? The Fed would not care. Goldman and Canyon Capital would sue if short-sheeted but when was the last time you read the Fed sued anybody? It can close banks but this is the media. The down side to this is that the slow slide of iHeart will become that famous phrase, “kicking the can down the road” to the detriment to programming at least beyond my lifetime.
I know…all silly stuff but silly is the substance of establishment media now.
The important thing is getting you back on the air. Consider, since I think you and Ken Broo outstanding in your fields, how about a “paid” podcast? I would pay (within reason) to hear both of you as a tag team (I know he is on WLW and strangely, NOT being a sports dude, I make a point to tune in). How about that spot I hear on the radio… turn your cell phone into a microphone?
Best wishes for a prosperous and low stress New Year. Waiting for another brilliant George Clooney allegory.
 Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security. A typical example of securitization is a mortgage-backed security (MBS), which is a type of asset-backed security that is secured by a collection of mortgages.
 A central bank implements quantitative easing by buying financial assets from commercial banks and other financial institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the money supply.