New Coverage: Clear Channel Outdoor’s Access to Leverage-Based Debt and Liens Baskets Requires Substantial Improvement to Leverage Ratios

Relevant Items:
Clear Channel Outdoor Covenants Tear Sheet, Debt Document Summaries
Clear Channel Outdoor Debt Documents

Clear Channel Outdoor (“CCO”) is a global out-of-home advertising company. According to the company’s 2020 10-K, the company has advertising displays in 31 countries; its advertising structures include print and digital billboards, street furniture displays, bus and rail displays, and airport displays. CCO describes itself as “the only global out-of-home advertising company with scaled presence in the United States and Europe.”

CCO’s two reportable business segments are its Americas segment, which consists of operations primarily in the United States, and its Europe segment, which consists of operations in Europe and Singapore. CCO also has operations in Latin America, but these do not meet the reportable threshold and are disclosed as “Other.”

CCO, previously controlled by iHeartMedia, was spun off as an independent company on May 1, 2019, in connection with iHeart’s emergence from chapter 11. iHeart’s equity in CCO, representing 89.1% of the outstanding common stock, was transferred to certain holders of claims in the chapter 11 case.

As previously reported by Reorg, CCO released its third-quarter financial results on Nov. 9, including adjusted EBITDA of $136 million, up from $31 million in the prior-year quarter, and revenue of $596 million, up 33% from $448 million in the prior-year quarter.

CCO’s third-quarter revenue included $319 million from the company’s Americas segment and $262 million from its Europe segment, reflecting increases of approximately 43% and 21%, respectively, over the prior-year quarter.

According to the release, CCO reported “a significant increase in bookings across the company, with many of our markets exceeding 2019 levels, particularly those in the U.S.” The release further stated that CCO “remain[s] committed to reducing [its] overall indebtedness” and “will continue to evaluate disposition opportunities.”

A summary of CCO’s corporate structure, as of March 31, giving effect to the June 2021 issuance of its 2029 unsecured notes and redemption of its 2024 unsecured notes, is shown below:

Clear Channel Outdoor Holdings Inc., the publicly traded entity, is the borrower under a term loan and revolving credit facility under the same credit agreement and an asset-based revolving facility and is the issuer of $1.25 billion of secured notes due 2027 and a total of $2.05 billion of unsecured notes due 2028 and 2029. Clear Channel International BV (“CCIBV”), a Dutch subsidiary that with its subsidiaries comprises CCO’s Europe segment, is the issuer of $375 million of secured notes due 2025 (the “CCIBV Notes”).

CCO has also disclosed that in June “one of the Company’s non-guarantor European subsidiaries” entered into a €30 million unsecured loan “through a state-guaranteed loan program established in response to COVID-19” (for additional details, see note 5 in the capitalization table below).

On Oct. 26, CCO repaid the $130 million outstanding balance under its revolving facility using cash on hand.

CCO’s capital structure, as of Sept. 30 and pro forma for the October revolver repayment, is summarized below:

 

Out-of-home advertising declined sharply in early 2020 as the spread of Covid-19 disrupted consumer movement and behavior. In June 2020, CCO entered into an amendment to its senior secured credit agreement amendment, suspending a first lien leverage maintenance covenant in favor of a minimum liquidity covenant.

During the covenant relief period, CCO is subject to additional restrictions under the agreement including a bar on dividends and limited access to other covenant baskets. In May 2021, CCO amended the agreement again, continuing the suspension of the financial covenant through the fourth quarter of 2021, among other things.

CCO took other measures to shore up liquidity and increase flexibility during the pandemic, including a $150 million revolver draw in March 2020 (which has now been fully repaid), the issuance of $375 million of CCIBV notes, cost reductions and a restructuring plan initially projected to result in pre-tax annual cost savings of $32 million.

In April 2020, CCO sold its China business (a 51% share in Clear Media Ltd.) for $253 million. Although the sales process predated the pandemic, net proceeds of the sale also contributed to liquidity.

Also in 2020, CCO refinanced $1.9 billion of 9.25% unsecured notes due 2024 with $1 billion of 7.75% unsecured notes due 2028 and $1.05 billion of 7% notes due 2029, extending its maturity runway and lowering interest costs.

Key provisions of the 2020 amendments to CCO’s credit agreement are as follows:

• Leverage maintenance covenant suspended: A springing financial maintenance covenant requiring compliance with a 7.6x net first lien debt ratio was suspended through the fourth quarter of 2021 but will apply again to the first quarter of 2022 or upon occurrence of a “Specified Event” (see below). As amended, the test will tighten to 7.1x beginning in the third quarter of 2022.


• Minimum liquidity covenant: During the “Liquidity Testing Period” (until a compliance certificate is submitted for the first quarter of 2022), CCO is subject to a minimum liquidity covenant, tested monthly, requiring at least $150 million of liquidity, defined as unrestricted cash plus total availability under the revolver and ABL facility.


• “Specified Events”: During the liquidity testing period, any of the following events constitutes an event of default and will cause the leverage covenant to be immediately reinstated:
  
  
  
  • Any restricted payment under specified baskets, including all general-purpose baskets.
  
  
  • Only if pro forma liquidity is less than $250 million, prepayment of any unsecured or junior lien debt from cash on hand or proceeds of revolving debt (including under ABL) or prepayment of junior debt (payment-subordinated debt exceeding the greater of $50 million and 8% of EBITDA) using the available amount, leverage-based or shared capacity prepayments baskets.
  
  
  • An election to convert to a real estate investment trust.
  
  
  
  

Each of these covenants, including the leverage covenant once reinstated, is controlled by the revolving lenders; a breach would not constitute a default or event of default with respect to term loan lenders until revolving lenders have accelerated and terminated their commitments.

As of Sept. 30, pro forma for the Oct. 26 revolver repayment, CCO had approximately $666 million of liquidity, consisting of $470 million of cash and $196 million of availability under the revolver and ABL facilities.

According to CCO’s 10-Q, $200.5 million of the company’s cash balance as of Sept. 30 was held by foreign subsidiaries. As discussed below, the company’s flexibility to transfer cash held by European subsidiaries to the United States may be limited by restrictions under the CCIBV notes.

 

• Minimum liquidity covenant: Currently, CCO is subject to a $150 million minimum liquidity covenant, tested monthly until a compliance certificate is submitted for the first quarter of 2022. As of Sept. 30 and pro forma for the revolver repayment, the company was in compliance with the liquidity covenant, with approximately $666 million of liquidity for covenant purposes.


• Leverage covenant: The leverage maintenance covenant under the credit agreement is currently suspended but may be tested again for the first quarter of 2022. The covenant will initially require compliance with a 7.6x net first lien debt ratio, tightening to 7.1x beginning in the third quarter of 2022.
  
  If the borrower meets a 6.5x net total debt ratio, the covenant will be tested when revolving usage exceeds 35%; if the borrower cannot meet a 6.5x net total debt ratio, the covenant will be tested when revolver usage is more than zero (in each case, the usage calculation excludes up to $10 million of undrawn letters of credit).
  
  As of Sept. 30, pro forma for the revolver repayment, CCO’s net first lien debt ratio was approximately 9.1x. Assuming no change to debt or cash, CCO’s LTM adjusted EBITDA would need to increase from $302 million to approximately $361 million to comply with a 7.6x net first lien ratio.
  
  Given CCO’s adjusted EBITDA of $234 million for the second and third quarters of 2021, CCO can likely comply with the financial covenant if tested for the first quarter of 2022 as long as it achieves $127 million of adjusted EBITDA over the next two quarters, reflecting an average of about $64 million per quarter.
  
  For reference, CCO’s quarterly and LTM adjusted EBITDA from recent quarters are shown below:

 

• Debt and liens: CCO’s secured debt capacity under its debt documents is currently limited by the 2028 and 2029 unsecured notes, which permit up to $569 million of additional secured debt, all of which can be secured pari with the term loan, revolver and 2027 secured notes. To comply with CCO’s credit agreements, at least $365 million of this amount must be under existing commitments or must constitute incremental or incremental equivalent debt.
  
  Given these limits, CCO could draw all available capacity under its revolving and ABL facilities ($196 million, as of Sept. 30, accounting for $104 million of outstanding letters of credit), and incur an additional $373 million of secured debt from other sources.
  
  CCO’s debt documents currently do not provide any additional capacity for structurally senior, junior lien or unsecured debt. However, up to $204 million of the $569 million of secured debt capacity could alternatively be used for structurally senior debt, secured by nonguarantor assets, and all secured debt capacity could be used for junior lien or unsecured debt.


• Leverage-based debt capacity: Under the 2028 and 2029 notes, the credit facilities basket provides additional secured debt capacity of $610 million (or 100% of EBITDA, if greater) if the company complies with an 8.25x net total debt ratio.
  
  Other leverage-based debt capacity under CCO’s debt documents, none of which is currently accessible, is summarized below:

• Dividends: CCO is not permitted to pay dividends (except for certain limited purposes) during the liquidity testing period, which continues until submission of a compliance certificate for the first quarter of 2022.


• Investments: CCO’s investment capacity is currently limited by the CCOH notes, each of which permits up to $1.45 billion of investments, including investments in unrestricted subsidiaries.

• Transfer of CCIBV cash: According to CCO’s 10-Q, $200.5 million of the company’s cash balance as of Sept. 30 was held by foreign subsidiaries. To the extent such cash is held by European subsidiaries, the restricted payments covenant in the CCIBV notes may limit the company’s ability to transfer such amounts to U.S. parent companies.
  
  Under the CCIBV notes, CCIBV’s dividend capacity is limited to $25 million under a general RP basket, plus capacity under a builder basket based on 50% of CNI from July 1, 2020. However, CCIBV’s access to the builder basket requires compliance with a 2x fixed-charge coverage ratio or a 4.5x total leverage ratio. Based on reported financials for the Europe segment, CCIBV likely did not meet either ratio test as of Sept. 30.


• Restricted debt: During the liquidity testing period, repayment of unsecured or junior lien debt using cash on hand or revolving proceeds (including under the ABL) requires pro forma liquidity of at least $250 million.
  
  After the liquidity testing period has ended, prepayment restrictions under CCO’s debt documents will apply only to payment-subordinated debt, which the company currently does not have. CCO’s debt documents will not restrict the prepayment of unsecured or junior lien debt.

For CCO’s covenants tear sheet, click HERE. For full summaries of CCO’s debt documents, click HERE.

--Mitch Oates