iHeart and Existential Questions About CDS

An Insider shout out to Gabe Oliverio at Johnsen, Fretty & Company who sent us the following DebtWire Radio podcast on iHeart Media and a discussion of their options as they came upon a mid-December payment deadline on a $250 million debt payment. 

As you may know iHeart Media, Inc. is the parent company of Clear Channel Outdoor

Here is the link to DebtWire Radio.  

The podcast discussion centers around a couple of themes. The first is Credit Default Swaps (CDS) and their implications for iHeart Media.  If you are not familiar with Credit Default Swaps, a CDS is designed to transfer the credit risk of a loan between two or more parties. In a credit default swap, the buyer of the swap makes payments to the swap’s seller up until the maturity date of a contract.  A credit default swap is the most common form of credit derivative and is a part of iHearts debt structure.

These CDS derivatives can be traded and as the debt payment was closing in on its due date, the price for the derivatives increased, perhaps an indication that iHeart might not make it’s payment.  They in fact did make the payment as scheduled….mostly.

However, they did not make the entire payment of $250 million that was due, holding back a payment due on $57.1 million in notes held by subsidiary Clear Channel Holdings, Inc. – money it essentially owes itself.

That brings us to the second theme of the podcast which is a “springing lien”.  As a part of the debt structure,  iHeart agreed to pledge extra collateral, called a “springing lien,” to some bondholders if iHeartMedia’s total amount of outstanding “legacy notes” dropped below $500 million. The concern with the full $250 million payment would have meant the legacy notes would have dropped below the $500 million threshold and triggered the release of the additional collateral which would include physical assets such as radio broadcasting towers and billboards. iHeart chose to not release the additional collateral which could perhaps remain a bargaining chip in later discussions on restructuring the entire debt.

With $8.3 billion in debt coming due in 2019 and overall leverage of 7 times on senior debt and 11.4 times we will keep you apprised on future details.

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