Sponsors Have Edge in Clear Channel Fight

"This proposal is yet another disingenuous attempt by the banks to avoid living up to their commitments. The banks want to move this case into the back room because they fear that a public trial will clearly expose their misconduct," the private equity firms said in a statement.

Sounds like fighting words to the Prince. The Prince has stayed on the sidelines on the Clear Channel (CCU) dispute until this point. The buyout firms’ quick rejection of the arbitration offer from the syndicate of banks prove once again the Prince’s earlier argument (Wall Street’s Short Memory on Private Equity) about how much leverage sponsors have when it comes to negotiations on committed financings. If a group of financial sponsors wants to get get a deal done then they have very few incentives to give concessions to the banks that committed financing. The fact is the banks and the private equity firms are essentially engaged in a continuous multi-decision game and have relationships that negotiations will test. However, given the short memory of Wall Street, it is unlikely that any buyout firm will see real repercussions in the future if it forces the banks to honor their commitments. Provided the private equity firm has capital in the future to invest The Prince guarantees that there will be bankers willing to forget the past to get a deal done. Any banker threatening in committed financing negotiations to not be as aggressive next time on terms or not show a sponsor a company first is probably full of it. The sponsors know this.

Let’s briefly review. The Clear Channel deal has been in the pipeline forever. Since July of this summer the banks began to drag their heals and push back. However, even before this point, the sponsors underwent a rather embarrassing battle with shareholders over what was a fair price. This $26bn buyout secured roughly $19bn in bank loans and high yield debt from the syndicate of investment banks led by Citigroup. The banks would have earned nearly $400m on the financing but the shutdown of the leveraged loan market this summer made syndicating the debt at a net profit impossible. This deal was supposed to close months ago and would have closed a few week had the banks not put their foot down on a specific term that was a deal killer for the sponsors. The sponsors quickly filed suit in New York and Texas with Clear Channel joining the Texas suit. The banks petitioned to have the case moved to New York. Today the banks said they were prepared to submit to the decision of an independent arbitrator and believed that the matter could be resolved within six weeks (see the text of the offer). The buyout firms quickly refused the offer. "We are ready to complete the deal to buy Clear Channel on terms consistent with the binding commitments the banks made nearly a year ago, and provided all the documentation needed to execute the funding, but the banks refused to sign," the private equity firms said.

This kind of reminds the Prince of when Merck tried a few cases to try to set a precedent for how large the settlement would have to be over Vioxx. The banks are going in to this one hoping they can set a precedent which will allow them to wiggle out of other committed financings in this environment or at least limit the pain. The thought process is something like there is a speeding truck heading towards us and its hood says BCE.

It is probably a good thing for the industry that the Clear Channel suit brought by the sponsors against the banks will go to court. Hopefully, it will be tried in New York. Having this case go to court will set a precedent for how the industry and the courts should treat committed financings. In an ideal world the case would be argued and decided before other massive buyouts, like BCE, go through. The financial sponsors have a better case in the Clear Channel suit and The Prince knows they are going to win if this suit goes to trial. However, the decision will be more important as a precedent for future negotiations. This is probably one of the most important cases in quite some time in terms of its potential to remake the relationship between the sponsors and the investment banks. The reputations of all the parties involved in this case are on the line but the banks have the most to lose and the sponsors have the most to gain. The private equity firms didn’t blink in this negotiation and it will make future negotiations much easier for sponsors as a whole when they win. The hearing this Thursday in New York should be interesting.