FACING THE MUSIC
Bankruptcy not the weapon it was for PE firms
Buyout kings lately are having a harder time bullying creditors with bankruptcy threats.
A year ago, lenders to radio broadcasting giant iHeart Media were getting threats from private-equity firms Bain Capital and Thomas H. Lee Partners, who demanded they take a haircut on $15 billion in bonds and cede control of the company in order to avoid a bankruptcy filing.
As soon as Monday, however, iHeart is expected to file for Chapter 11, with creditors led by Franklin Resources and Pimco poised to seize a controlling stake worth about $11 billion (including Clear Channel Outdoor).
Bain and THL, meanwhile, are expected to end up with a stake of about 2 percent, worth maybe $100 million.
“They thought creditors would be afraid,” a source close to the iHeart creditors told The Post. “The buyout firms didn’t accept the new reality, and it took a long time for them to believe they would lose control.”
The “new reality,” insiders say, is that creditors are wising up and banding together against private-equity firms. In the case of iHeart, that meant Franklin lining up 31 creditors for an unprecedented cooperation agreement that amassed enough debt to stop Bain and THL from forcing their plan through bankruptcy court.
The lucrative bondholder backlash has surfaced as “private equity has gotten increasingly aggressive in an attempt to save some of their investments,” Seton Hall Law Pro- fessor Stephen Lubben told The Post. “Basically the attitude seems to be, ‘Let’s see if we can get away with this.’”
Two years ago, billionaire Leon Black’s Apollo Management managed to keep control of teen retailer Claire’s Stores, despite forcing it into an out-outof-court reorganization at the expense of bondholders. (Claire’s now appears to be headed for bankruptcy.)
More recently, the intellectual property of J. Crew got shunted into a new subsidiary and away from creditors as the retailer grapples with plunging profits — a ploy by TPG Capital and Leonard Green & Partners that’s being challenged in court.
It’s not yet clear how the J. Crew case will play out, but last year Apollo failed in a court bid to split casino giant Caesars Entertainment into two companies, with a judge ruling that Apollo hadn’t given lenders led by billionaire David Tepper’s Appaloosa Management fair consideration in the deal.
Apollo “had multiple opportunities to settle the Caesars case, but they refused,” according to one source close to the talks.
The Appaloosa group received 65.5 cents on the dollar — more than seven times the 9 cents Apollo originally offered — bagging an extra $3 billion.
“Private equity firms are not sure yet if iHeart and Caesars were flukes or whether they have to change,” according to the iHeart source.
Law firm Jones Day advised the Appaloosa group in Caesars, as well as the group that formed the iHeart cooperation pact.
Another similarity: Franklin was a creditor in both companies. Although it was not part of the Appaloosa group, “they saw what happened in Caesars and said let’s do it again,” according to an iHeart creditor.
Bain, THL and Jones Day declined to comment.