A legal spat over the proposed leveraged buyout of Texas-based media company Clear Channel intensified on April 4, as five banks filed a counterclaim in New York against the company and its private equity suitors.Boston-based buyout firms Bain Capital and THL are pursuing six banks they accuse of balking at commitments to fund a $26 billion takeover of Clear Channel. The firms, which filed separate complaints in New York and Texas on March 26, said the banks tried to change the deal’s terms to deliberately torpedo it.
In their counterclaim, five of the six banks deny the bulk of the accusations levelled against them. The six banks are Citi, Credit Suisse, Deutsche Bank, Royal Bank of Scotland, Morgan Stanley and Wachovia. Deutsche Bank is not named as a defendant in the New York complaint.
Spokespeople for Bain and THL said there was “nothing new” in the banks’ counterclaim. “We want to complete the deal to buy Clear Channel, and are looking forward to proving our case that the banks should be forced to live up to the binding commitments they made to finance the transaction,” they said.
The groups agreed to buy the media company for $37.60 a share in November 2006, eventually upping this offer to $39.20 a share in May 2007. Clear Channel’s shareholders subsequently approved the deal last September.
In their New York complaint, the private equity firms said the banks “competed energetically” during 2006 to provide financing for the transaction. The structure agreed upon in the financiers’ commitment letter, according to Bain and THL, was to provide $22.125 billion using a so-called ‘collateral-lite’ structure. This included $18.52 billion in senior secured credit facilities with maturities up to 7.5 years, a $1 billion receivables-backed six-year revolving credit facility and a $2.6 billion unsecured eight-year bridge facility.
In return, Bain and THL said the banks would have earned over $400 million in fees. But when the credit crunch dealt a blow to their ability to syndicate this debt, the private equity firms said, they became desperate to avoid billions of dollars of mark-to-market losses.
By January 2007, the complaint said, the banks admitted they would suffer losses of more than $2.65 billion in financing the Clear Channel takeover. The ways the banks allegedly tried to avoid such losses ranged from making “hat in hand” requests to the transaction sponsors for different deal terms, to others that were less benign. Citi, for instance, is accused of threatening to pull the plug on financing for another takeover with one of the two buyout groups, unless its exposure to the Clear Channel transaction was reduced. This threat was not followed through, said the court filing.
Negotiations for the acquisition of the Texas media company continued nonetheless, according to Bain and THL. But while the six banks continued to work on the transaction, they inserted terms into the final agreement that “can only have been designed ultimately to kill the deal”, the firms said. They include prohibiting Clear Channel from paying off its existing debt using the agreed credit facilities while its leverage ratio (of indebtedness to earnings before interest, tax, depreciation and amortisation) was above 6:1. This condition, the court filing alleged, was one the banks knew the company could not meet and was contrary to the terms of the banks’ commitment letter.
This and other restrictions on repaying Clear Channel’s debt following its acquisition, the private equity firms alleged, would have meant a liquidity crisis at the company within three years.
In their counterclaim filed in New York on April 4, five of the six banks denied these allegations. They said the transaction terms finally proposed were consistent with their commitment letter, and argued the takeover documents limited their liabilities to $600 million or less.
A spokesperson for all six banks said they were ready to honour their commitment letter and agree funding on “mutually agreeable terms”. They had negotiated in good faith, according to the statement, unlike Bain and THL. “If the sponsors truly desire to complete the transaction, there is sufficient time for them to return to the negotiating table to work toward an agreement on final documentation.”
An expedited hearing of the New York case has been set for May 5.
Courtroom manoeuvres over the stalled acquisition are also continuing in Texas, where a US district court judge rejected an attempt by the banks to gain federal jurisdiction over it on April 2.
On March 26, a temporary restraining order against the six banks was awarded by a state court there, stopping them from destroying transaction documents, refusing funding for the merger, or derailing it by various other means.
Clear Channel, along with a subsidiary of Bain and THL, is a plaintiff in the Texas case but not in the New York complaint. The company declined to comment on the issue.
See also: Subprime and punishment
More on Regulation
SSM chair also wants to end rule opt-outs that make banks "look stronger than they really are"
Dodd-Frank and Mifid II won't stop market disorder but will penalise hedgers
Floors framework should not overstate risk, says Sweden's bank supervision chief
RBS risk veteran says banking activities pose greater threat
Sign up for Risk.net email alerts
Sponsored video: MarketAxess
Sponsored video: Tradeweb
Multifonds talks to Custody Risk on being nominated for the Post-Trade Technology Vendor of the Year at the Custody Risk Awards 2014
Sponsored webinar: IBM Risk Analytics
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.