CC MEDIA HOLDINGS INC CCMO
May 14, 2013 - 12:55pm EST by
Firmgmt
2013 2014
Price: 102.00 EPS $0.00 $0.00
Shares Out. (in M): 84 P/E 0.0x 0.0x
Market Cap (in $M): 291 P/FCF 0.0x 0.0x
Net Debt (in $M): 19,522 EBIT 0 0
TEV ($): 20,116 TEV/EBIT 0.0x 0.0x

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  • Undervalued Bond
  • Radio
  • Online Advertising
  • Private Equity (PE)
 

Description

Clear Channel 9% 2019 bonds are an attractive risk-reward at 102 Good coupon, high current yield, and good asset coverage, with a call price of 104.5 in 2016, these bonds could rally to 108/109, which would be a ~ 15% unlevered return. On the downside, the bonds could trade down in a bearish market to the low 90's, so you give up the annual coupon, but the overall return on the position is flat to slightly negative.

Clear Channel was acquired by Bain Capital and TH Lee at the top of the LBO market in 2007 for $24bn (~12x LTM EBITDA). The business is comprised of two units: Outdoor Advertising and Radio Broadcasting, of which CCMO is the industry leader in both categories. This is a classic "good business", "bad balance sheet" situation. The top of the capital structure offers investors opportunities to earn good returns while offering downside protection given the robust unlevered cash flows of the business. It remains to be seen whether the sponsors will be able to grow the business into its capital structure and create equity value, but I feel comfortable that there is a lot of equity value through the bank debt and priority guarantee notes (including the 9% of 2019s).

The maturity stack in 2016 is still quite hefty, even with all the refinancings the company has accomplished over the past 2+ years. There is roughly $8bn of bank debt and $1.3bn of bonds that come due in 2016, and the company has been slowly extending maturities while attempting to manage interest costs. Leverage thru the priority guarantee notes is approximately 8x (including debt at the Outdoor subsidiary). Adjusting for the equity value of the Outdoor subsidiary, we believe holders of the bank debt and PGNs are creating the radio business at an unlevered FCF yield of ~12%, which compares quite favorably to its public radio peers, which trade around 10% unlevered FCF yields. Hence, in a restructuring scenario (which may come in early 2016), we believe the notes are covered at par. If we collect 9 pts per year for the next three years, our basis in the 9% of 2019s would be roughly 75%, providing a large margin for error on our estimates and still make a nice profit.

On the upside, the notes could trade well above the call price of 104.5 given the call date is not until July 2015. Yield to worst does not drop below 7% until a price of 108. At 109, the yield to worst is still 6.5%. The notes trading to 109 would result in a 15% total return (assuming it takes one year to trade there).
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

The catalysts for the bonds to trade to 109 are two-fold: First, extending the bonds that mature in 2016 just behind the bank debt, which would create more runway for the company to address the $8bn of remaining bank debt that matures in 2016. A refinancing of the 2016 bank debt would allow the markets to feel comfortable that the 9% bonds will continue to collect coupon and that the company has more time to grow into its over-levered balance sheet. Second, the company exhibiting real growth in EBITDA would push the entire cap structure upwards. While the macro picture has been sluggish, the company has started to make real in-roads with advertisers as it promotes the company has a unique national platform to reach consumers. The management team has been laser-focused on taking market share from other forms of media, such as newspapers and TV, and any positive results from these efforts would generate a substantial amount of equity value, given the operating leverage in the businesses.
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    Description

    Clear Channel 9% 2019 bonds are an attractive risk-reward at 102 Good coupon, high current yield, and good asset coverage, with a call price of 104.5 in 2016, these bonds could rally to 108/109, which would be a ~ 15% unlevered return. On the downside, the bonds could trade down in a bearish market to the low 90's, so you give up the annual coupon, but the overall return on the position is flat to slightly negative.

    Clear Channel was acquired by Bain Capital and TH Lee at the top of the LBO market in 2007 for $24bn (~12x LTM EBITDA). The business is comprised of two units: Outdoor Advertising and Radio Broadcasting, of which CCMO is the industry leader in both categories. This is a classic "good business", "bad balance sheet" situation. The top of the capital structure offers investors opportunities to earn good returns while offering downside protection given the robust unlevered cash flows of the business. It remains to be seen whether the sponsors will be able to grow the business into its capital structure and create equity value, but I feel comfortable that there is a lot of equity value through the bank debt and priority guarantee notes (including the 9% of 2019s).

    The maturity stack in 2016 is still quite hefty, even with all the refinancings the company has accomplished over the past 2+ years. There is roughly $8bn of bank debt and $1.3bn of bonds that come due in 2016, and the company has been slowly extending maturities while attempting to manage interest costs. Leverage thru the priority guarantee notes is approximately 8x (including debt at the Outdoor subsidiary). Adjusting for the equity value of the Outdoor subsidiary, we believe holders of the bank debt and PGNs are creating the radio business at an unlevered FCF yield of ~12%, which compares quite favorably to its public radio peers, which trade around 10% unlevered FCF yields. Hence, in a restructuring scenario (which may come in early 2016), we believe the notes are covered at par. If we collect 9 pts per year for the next three years, our basis in the 9% of 2019s would be roughly 75%, providing a large margin for error on our estimates and still make a nice profit.

    On the upside, the notes could trade well above the call price of 104.5 given the call date is not until July 2015. Yield to worst does not drop below 7% until a price of 108. At 109, the yield to worst is still 6.5%. The notes trading to 109 would result in a 15% total return (assuming it takes one year to trade there).
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    The catalysts for the bonds to trade to 109 are two-fold: First, extending the bonds that mature in 2016 just behind the bank debt, which would create more runway for the company to address the $8bn of remaining bank debt that matures in 2016. A refinancing of the 2016 bank debt would allow the markets to feel comfortable that the 9% bonds will continue to collect coupon and that the company has more time to grow into its over-levered balance sheet. Second, the company exhibiting real growth in EBITDA would push the entire cap structure upwards. While the macro picture has been sluggish, the company has started to make real in-roads with advertisers as it promotes the company has a unique national platform to reach consumers. The management team has been laser-focused on taking market share from other forms of media, such as newspapers and TV, and any positive results from these efforts would generate a substantial amount of equity value, given the operating leverage in the businesses.

    Messages


    SubjectLBO Notes
    Entry05/14/2013 01:02 PM
    Membereal820
    Thoughts on how they deal with LBO bonds? This seems to be the big question right now and market treating them like they are likely to make it through them. Company has very little cash at CCME with majority at CCO which would require cash flow leakage if they divvy it up PLUS not clear how much is stuck at CCO Intl. What else could they give them besides some new paper pushed out with perhaps a higher maturity? Are those impaired - i.e. will the offer be at a new paper but less than par? Would you short those against the 9s? Market seems to think they are not impaired and will be taken care of one way or another. Any idea what kind of "currency" they can use to deal with the LBO notes?
     
    Thoughts on how liquidity plays out as they continue to swap bank to PGNs at higher rates? Is it possible everyone focusing on maturity wall whereas liquidity (Interest ticking up, not so clear where EBITDA shakes out, plus have small legacy bond maturities that eat away at cash) could be what "gets" them? I think bonds could trade lower than 90 in the event that the structure collapses though agree that the coupon we clip in the interim will reduce basis. Can you elaborate more on how you are valuing the business in your recovery scenario (where you conclude bonds worth par)?

    SubjectLBO Note Exchange
    Entry05/21/2013 12:51 PM
    Membereal820
    CCU just announced exchange offer for the LBO notes - $550mm of current holders signed up. 2021 paper at 12%; Cash pay notes exchanged at par and Toggle notes exchanged at .93 in new notes and .07 in cash. If get this done in larger size than the $550mm they have signed up then will be major step forward in chipping away at the harder part of the 2016 wall.
     
    Structure is moving as expected on this - 5 Yr CDS down 4 pts. Cash bonds up.

    SubjectLiquidity
    Entry05/28/2013 04:36 PM
    Membereal820
    Everyone focuses on maturities but seems like major issue for them will be simply covering fixed costs (Interest & Capex, even a dialed down capex). What EBITDA, Interest and Capex assumptions do you have for the next few years, obviously assuming some PF adjustments for the exchanges. The math seems to get tight to simply not working (especially when factor in the Legacy bond maturities which are a few hundred million a pop)?
    thanks
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