Cumulus Goes Chapter 11; How Long for iHeart?

Bloated with more than $2 billion dollars in debt racked up in the wake of the late 90s-early 00s radio station consolidation orgy, Cumulus Media has finally taken the plunge into Chapter 11 bankruptcy reorganization. The path from there to here began when Cumulus hired Mary Berner as the CEO in 2015 – primarily for her prowess in shepherding Reader’s Digest through the Chapter 11 process back in 2009, when that company carried a nearly identical amount of debt.
Things got real back in September, when the Wall Street Journal reported that the company had begun negotiations with creditors who hold “big chunks” of the company’s debt. This was prompted in part by the company’s pending delisting from the NASDAQ stock exchange after CMLS shares trended below $1 and stayed there; the company’s net equity had previously fallen below the NASDAQ minimum, which is also a delistable event.
Then Cumulus intentionally skipped a $23 million interest-payment on its debt that was due November 1. It told the Securities and Exchange Commission it did this “in support of the Company’s efforts to develop and implement a restructuring that will allow the Company to continue its operational and financial momentum,” and noted that the missed payment would trigger a default after 30 days.
In a memo to staff, CEO Berner was frank about the fact that “we can’t fully turn the company around until we reduce our excessive debt-load,” and that skipping the payment would incentivize creditors to compromise to avoid default.
By mid-November, Cumulus tendered to the SEC a proposal whereby those parties who own a quarter of the company’s debt ($610 million) as bonds would convert them into equity in the reorganized company…after ponying up $350 million to help with the process. This was not a sign that discussions with creditors were progressing, but rather a legal obligation to keep the SEC informed of the process. The severe haircut creditors would take did not bode well.
On November 22, NASDAQ delisted CMLS stock. Its share-price on the OTC market has taken a beating, falling from 28 cents to 16 cents on its first trading day (now down to 7 cents a share).
After the close of business on November 29, Cumulus filed for Chapter 11 bankruptcy reorganization in a New York court, beating off default by just a day. The terms of the bankruptcy stand to wipe out about a billion dollars of the company’s outstanding debt, which includes all its bonds and a portion of its loans. However, those who hold the loans (a consortium of banks and private-equity funds) – will end up with 83.5% of the reorganized company’s equity, while the bond-holders get just 16.5%. Cumulus’ common stock will be wiped out and shareholders will not be recompensed.
Within a day, a committee of creditors, led by the bond-holders, formally objected to the bankruptcy plan: having held 25% of the company’s debt, they figure they should get 30% of the reorganized equity, and they’re only being offered half that. A series of court hearings have been scheduled between now and February to handle other motions from both secured and unsecured creditors, the latter of whom have already filed their own objections to the restructuring plan.
Cumulus hopes its creditors will vote to approve the reorganization conditions by the end of February; if so, it projects it would exit bankruptcy by the end of May. But the omnibus hearings that the bankruptcy judge has scheduled for that month may have a material effect on both the coalition of creditors backing the reorg play and the will to fight among those to whom Cumulus owes money but aren’t covered by the plan.
iHeartMedia is expected to follow Cumulus into Chapter 11 bankruptcy. It’s been playing debt-footsie with creditors for much longer, in part because it’s a much larger and more complex conglomerate with debt ten times that of Cumulus. For the first three quarters of this year, iHeart’s operated at a net loss, adding another $248 million to its $20+ billion debt.
iHeart’s also already taken many of the steps that Cumulus did on its way to Chapter 11. It’s been juggling money between its component parts for some time now in order to keep debt “manageable.”
In October, the outdoor-billboard division (which, incidentally, is the company’s largest profit-center) called in a $25 million loan it had given its corporate parent back in 2005. Once it got the money, it was immediately disbursed as a “special cash dividend” to those who own stock in the division – which just so happens to be the parent company. By this trick, iHeart was able to pay itself $22.4 million, which immediately went toward a debt payment.
That same month, an appelate court in Texas affirmed a 2016 decision by a judge in iHeart’s own backyard of San Antonio to deny some creditors’ attempt to call in their loans – all $3 billion – at once, which staved off an immediate default. Meanwhile in Delaware, an investor in iHeart’s billboard division who objected to the company’s use of it as a piggy-bank for debt-maneuverings tried to have his 2016 suit against the company reinstated, but was denied.
Don’t forget that iHeart’s also already tried provoking its creditors to refinance, partially skipping a payment on its debt last December, and repeated offerings to give them as much as half-ownership in a restructured iHeart have been resoundingly rebuffed. But Cumulus’ path to Chapter 11 seems to have made things more pressing.
The day after Cumulus announced bankruptcy, iHeart offered its creditors 87.5% stakes in both itself and the billboard-business if it would agree to wipe out $13 billion in debt. The creditors replied with an offer to take 95% of iHeart’s reorganized equity and 100% of its billboard arm.
That seems to have triggered another impasse, for on December 11 iHeart informed the SEC that it may seek to sell a significant proportion of its holdings in Clear Channel Outdoor, which still trades as a separate stock, in order to placate some creditors, somehow.
Industry analysts quoted in the above-linked articles now openly predict a court-ordered (i.e., Chapter 11 bankruptcy) restructuring is more than 75% likely in 2018, with some predicting it will take place sometime within the next six months.
One anonymous “dealmaker” tells the Tom Taylor Now newsletter that any reorganization doesn’t have to address iHeart’s total debt-load: if the company can convince its creditors to just cut their debt in half, to just $10 billion, “and they keep all their assets like Katz [advertising] and Premiere [syndication], they become scary, a real monster.”
Interestingly, some of those eyeing potential investment in a reoragnized iHeart include Clear Channel’s original founders, the Mays family. The pattern is clear, and it’s been applied across industries over the last twenty-plus years: tap the markets for fun and profit, bloat via acquisition, sell out to private equity, wait for it all to implode, then return to feast on the rubble. If Cumulus’ and iHeartMedia’s plans come to fruition, they’ll both be less than half as indebted as they are now, but at what cost to radio?

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