Clear Channell Deal Collapse

Banks financing the $19.5 billionuyout of Clear Channel Communications Inc. stand to lose about3 billion on the transaction because loan prices have tumbled. The banks committed to lend as much as $22 billion to fund the deal, $18 billion of it as senior secured loans. They have the most to lose if the deal goes ahead. The continuing crisis in the market for leveraged debt means they would have to mark down the value of their Clear Channel loans as soon as the deal closes and book the losses. Such debt has typically been marked down 15%, meaning the banks could lose $2.7 billion the moment they close the deal. Still, the commitment letters the banks signed when the deal was cut in May make it almost impossible for them to back out of their commitments. Banks led by Citigroup Inc. and Deutsche Bank AG agreed inApril to provide $22.1 billion for the purchase by private-equity firms Thomas H. Lee Partners LP and Bain Capital PartnersLLC. Since then, losses on subprime-mortgage securities spreadthroughout credit markets and loan prices for similar LBOs fellto as low as 85 cents on the dollar. Negotiations are stuck on details of the credit agreement,the Wall Street Journal reported, citing unidentified peoplefamiliar with the matter. The banks asked for more cash upfrontand stricter payment terms, the New York Times reportedyesterday, citing people briefed on the discussions. Thomas H. Lee and Bain, both based in Boston, agreed to pay$39.20 a share after raising their bid to $37.60 and givinginvestors a 30 percent equity stake in the company. Shareholdersapproved the deal in September. While lenders typically commit to financing when buyouts are announced, the final terms are worked out just before thedeal closes. A collapse may force the private-equity firms to pay asmuch as $600 million in breakup fees. Banks may be better off offering to pay the penalty on behalf of the firms rather than completing the deal, said Mark Patterson, chairman and co-founder of MatlinPatterson Global Advisers LLC, which invests inbankrupt and distressed companies. ``It's cheaper for the banks to pay breakup fees and getthe loan off their books than try and syndicate these loans at95 to 85 cents on the dollar,'' Patterson said. Clear Channel debt rallied in anticipation that thecompany's chance of default would be reduced without the burdenof the LBO debt. The cost to protect Clear Channel's existing debt fromdefault fell for a second day, indicating investors are lessconcerned about the debt. Credit-default swaps tied to thecompany's bonds narrowed 11 basis points to 637 basis points,according to CMA Datavision in London. That means it would cost$637,000 to protect $10 million in debt for five years.