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Clear Channel shareholders sue over loan from subsidiary

by Chris Nolter | Published March 12, 2012 at 10:44 AM

As Clear Channel Communications Inc. and its private equity backers manage the radio group's highly levered balance sheet, the company's 89% position in Clear Channel Outdoor Holdings Inc. has been a valuable asset.

The parent has been able to draw upon dividend payments funded by bond offerings at the advertising subsidiary to address its own debt.

Recently, a long-standing cash management agreement between Clear Channel Outdoor and Clear Channel Communications has created tension with some minority shareholders.

A Florida pension fund holding shares in the subsidiary filed suit against Clear Channel Outdoor, its directors, its parent company and backers, in the Delaware Court of Chancery on March 7.

The City of Pinellas Park Firefighters Pension Board claims in its suit that the defendants breached their duty over a $650 million promissory note to Clear Channel Communications. The note is underpriced and could increase to $1 billion, pleadings by Mark Lebovitch of Bernstein Litowitz Berger & Grossmann LLP allege, making the outdoor subsidiary an "involuntary source of capital."

Shareholders can hardly be surprised by the agreement, which had been disclosed since 2005, well before the 2008 leveraged buyout of Clear Channel by Bain Capital Partners LLC and Thomas H. Lee Partners LP.

Clear Channel Outdoor extended the agreement in 2009, as its parent was managing debt from the LBO.

"To ensure [Clear Channel Communications'] continued ability to exploit Outdoor for cash, [the parent] compelled Outdoor to amend-and-extend the terms of the loan," the suit states.

A Clear Channel spokeswoman said: "We're in the process of reviewing the complaint and have no further comment at this time." Bain and THL also declined to comment.

The pension fund is not the only shareholder upset about the agreement. Chicago hedge fund JHL Capital Group LLC had complained about the issue in a November letter to the company.

"The focus of the discontent is on the cash sweep," said analyst Brett Harriss, who follows Clear Channel Outdoor for Gabelli & Co. He added that the discontent among minority shareholders is "wide." Gabelli holds stock in Clear Channel Outdoor.

Harriss called the promissory note "a bad credit" that does not receive an appropriate yield for the risk.

"They don't even need to terminate the agreement," he said. "They just need to call the loan back in. They need to ask the parent for the money back."

The promissory note pays 9.25% interest. The pension fund argues in pleadings that the yield to maturity for Clear Channel parent company notes, relative to the price at which the securities are currently trading, is around 17.5%.

"These inter-company dealings have been the same for a long time," Michael Corty of Morningstar Inc. said.

"If you own Clear Channel Outdoor shares it should not be a surprise that you're getting the worst of it, given the overall ownership structure."

Clear Channel Outdoor's 2005 annual report outlined the terms of the agreement.

"Pursuant to a cash management arrangement, substantially all of our cash generated from our Americas operations is transferred daily by Clear Channel Communications into accounts where funds of ours and of Clear Channel Communications may be commingled," the report states.

If Clear Channel repaid the loan, the proceeds could arguably be collected in the cash sweep, and redirected to the parent.

The pension fund argues that Clear Channel Outdoor could receive just "pennies on the dollar" in a bankruptcy scenario.

Shares of Clear Channel Outdoor were trading Monday morning at $13.56, down 18 cents, or 1.31%.

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Clear Channel shareholders sue over loan from subsidiary

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