DBRS Publishes Updated Report on Clear Channel Communications

DBRS has published today an updated rating report for Clear Channel Communications, Inc. DBRS’s ratings on the Senior Notes & Debentures and Revolving Credit Facility of Clear Channel Communications, Inc (Clear Channel or the Company) remains Under Review with Negative Implications. The Company’s ratings have been Under Review with Negative Implications since October 27, 2006, following Clear Channel’s announcement that it would seek a plan to enhance shareholder value by privatizing the Company.

To summarize the events of the past year, Clear Channel’s shareholders have approved a privatization transaction under which, if completed, they would receive $39.20 for their shares. The shares are to be purchased by two private equity groups, Thomas H. Lee and Bain Capital (the Private Equity sponsors). The transaction has also been approved by all relevant regulatory bodies. The only closing condition that remains to be satisfied involves the agreement by the purchasers and their bankers on the final financing terms, specifically agreeing on the credit agreement that would govern the debt to be issued to fund the purchase of the shares. The Private Equity sponsors and Clear Channel are now involved in litigation with the banks, in a case that is related to their failure to agree to the final terms of the financing.

The report update provides an insight into DBRS’s view of the business risk profile of Clear Channel, and comments on the financial profile of the Company with an analysis of Clear Channel’s operating results and prospects should a privatization be ultimately consummated on the terms stipulated in Clear Channel’s public filings. DBRS makes no assessment of the probability of any outcome of the current litigation between the parties or on the likelihood of the transaction closing.

DBRS notes that Clear Channel has operational scale and scope that is advantageous to advertisers in reaching consumers. However, DBRS also notes that continued trends in new media are an obstacle for the Company as increased usage of MP3 (iPOD) devices, satellite radio and other digital media are changing the way consumers receive content. While the Company has been successfully addressing these developments with strategies such as its Less is More initiative (airing shorter commercials and less advertising per hour) for more than a year, the noted secular challenges are now compounded by a cyclical downturn in the U.S. advertising market.

Prospectively, the Company’s total debt following a privatization would approach $22 billion with a resulting leverage ratio of debt-to-EBITDA of just under ten times for F2008. DBRS notes this would result in a material deterioration in the company’s financial profile. DBRS has previously indicated that should this level of leverage materialize, an Issuer Rating in the B-range would likely result. This rating would reflect a combination of a strong business risk profile that remains characteristic of an investment grade credit with its ability to extract EBITDA margins above the 30% level and the weak capital structure resulting from the significant amount of leverage the Company would carry should the pending transaction close.

DBRS notes that the prospective buyers of Clear Channel plan to issue $14.8 billion of Secured Bank Debt at an intermediate holding company (see pro forma organization chart on page four). This structure has the effect of making the secured debt structurally superior to the existing Senior Notes at the Clear Channel level. This Secured bank debt is to be supported by assets which DBRS considers to have strong recovery prospects, given the security that these debt issues are to be afforded within the confines of the negative pledge under the existing Clear Channel notes, as well as the guarantees to be provided by the Clear Channel operating companies. Should a transaction materialize, DBRS would formalize its recovery analysis on Clear Channel to estimate a future point-of-default scenario for the Company. This would allow DBRS to assess the recovery value of the Secured Bank Debt. Leading to a rating for the Senior Secured Debt of up to three notches above the Issuer Rating.

DBRS notes that additional new debt is to be issued in the form of an Unsecured Bridge Facility or Notes at a second intermediate holding company. This debt could be rated between the Issuer Rating and Senior Secured Debt rating, depending on its recovery prospects, reflecting the benefit of a guarantee from the Clear Channel operating companies. DBRS notes this rating would be below that of the Secured Bank Debt, reflecting the lack of security to be afforded to these issues, as well as the structural subordination that DBRS notes exists in the corporate structure.

Following the close of a privatization of Clear Channel, should one occur on the terms identified in the related public filings, the Company’s existing Senior Notes are to be structurally subordinate to all of the new debt issues and are not expected to benefit from any security or guarantees. DBRS notes that these conditions may result in recovery prospects in a default scenario, which approach zero. This condition may lead to a rating on these debt issues that could be up to two notches lower than the Issuer Rating.

DBRS notes the prospect of the privatization not closing is not an insignificant possibility. As such, DBRS will not draw any conclusions at this point and will continue its Review until such time as events take place that clarify the direction the privatization transaction will take. At that time, DBRS will conclude its review and determine its new ratings. This will take into account all relevant information, including the consideration being given to Clear Channel’s prospective financial policy even if the contemplated transaction ultimately fails.

Notes:
All figures are in U.S. dollars unless otherwise noted.
This rating is based on public information.