DBRS Assigns Ratings to Clear Channel’s LBO Debt

DBRS has today assigned an Issuer Rating of B to Clear Channel Communications, Inc. (Clear Channel or the Company). This is in anticipation of the imminent close of the transaction which has privatized the Company for $36.00 per share or $22 billion. Additionally, based on DBRS’s Leveraged Finance Rating Methodology (see press release dated June 9, 2008 for details), DBRS has assigned recovery and instrument ratings to Clear Channel’s specific debt securities.

DBRS has assigned recovery and instrument ratings to Clear Channel’s Receivables Based Credit Facility of RR1/BB; RR4/B to its Senior Secured Term Loans and Senior Secured Revolving Credit Facility and RR6/CCC (high) to its Senior Unsecured Guaranteed Notes. Clear Channel’s existing Senior Notes & Debentures have been downgraded to CCC (high) with a recovery rating of RR6. All trends are Stable. Additionally, DBRS has discontinued its rating on the Company’s Revolving Credit Facility that was recently repaid as part of the privatization.

This rating action ends the Under Review with Negative Implications status that DBRS initiated on October 27, 2006, when the Company announced that it was exploring its strategic options. The privatization of the Company is now all but complete with shareholders having approved the transaction, all financing documentation finalized and the private equity buyers having deposited their equity contribution to escrow, with the deal expected to close on or about July 30, 2008.

Clear Channel and its shareholders, after a year-and-a-half of negotiations and lawsuits, ultimately approved a privatization transaction under which shareholders will receive $36.00 for each of their shares and an opportunity to own a pro-rata share of up to 30% of the equity of the parent company, CC Media Holdings. 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 transaction closing date has been extended numerous times, first by the shareholders who originally wanted a higher price and then due to litigation with the banks providing the financing over terms of the credit agreement.

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 privatization exceeds $22 billion with a resulting leverage ratio of debt-to-EBITDA of just under ten times for pro-forma for the most recent trailing twelve month reporting period. DBRS notes this results in a material deterioration in the company’s financial profile.

DBRS notes that the Issuer Rating of B reflects a combination of Clear Channel’s strong business risk profile that remains characteristic of an investment grade credit with its ability to generate EBITDA margins above the 30% level and the weak capital structure resulting from the significant amount of leverage the Company will now carry following the close of the privatization.

In assigning recovery and instrument ratings for Clear Channel’s debt issues, DBRS has simulated a hypothetical default scenario in order to assess the potential value of the Company in the event of default. DBRS is not predicting that default will occur or that, if it were to occur, that it would follow the exact scenario(s) outlined. This exercise is merely an analytical construct that DBRS uses to model the possible outcome for debt holders under various stressed default scenarios that are intended to be consistent with Clear Channel’s underlying issuer credit rating.

Given the strong business risk profile of the Company, DBRS has assumed that upon default the Company would continue as a going concern following a recapitalization. As such, DBRS determines an enterprise value using an EBITDA multiple applied to the Company’s EBITDA as modeled for the period following default. The default scenario assumes that by 2010, EBITDA has fallen from $2.2 billion for the 12 months ended March 31, 2008, to $1.46 billion, a reduction of 33%. The resulting valuation for total enterprise value in default is therefore $8.80 billion, which is 63% below the enterprise valuation paid by the private equity buyers of Clear Channel.

At the above noted distressed valuation level, DBRS believes the Receivables Based Credit Facility has outstanding prospects for full recovery given its over-collateralized structure which is further guaranteed by the guarantors of the senior secured term loans and senior secured credit facilities. Given such over-collateralization and enhancements result, DBRS believes that the recovery in default of this facility would be 100%. For this reason DBRS has assigned a recovery rating of RR1 and an instrument rating of BB, three notches above Clear Channel’s B Issuer Rating.

Clear Channel’s senior secured notes and senior secured credit facility are guaranteed by the Company’s immediate parent and all of its wholly-owned domestic restricted subsidiaries. Additionally this debt is secured by assets of Clear Channel and the guarantor subsidiaries up to the maximum amount allowed under the indenture governing the existing notes. Further, this debt is secured by a second priority lien on the accounts receivable that make up the collateral for the aforementioned receivables based facility. The residual value supporting these term loans and revolving credit facilities, after the receivables based facility had been satisfied from its collateral, would support only an average recovery. Therefore, these term loans and credit facilities have been assigned a recovery rating of RR4 and an instrument rating of B by DBRS.

Clear Channel’s new senior unsecured notes are unconditionally guaranteed by the same guarantors of the senior secured debt and the receivables based facility. However, these guarantees are subordinated to the guarantees on the above referenced secured debt. Due to the subordination of these notes, DBRS has assigned a recovery rating of RR6 reflecting the poor prospects of recovery as a result of the residual value available to debt at this level expected to be 0%. Consistent with the DBRS Leveraged Finance Methodology, recovery ratings of RR6 are given a two notch reduction from the Issuer Rating resulting in an instrument rating for these notes of CCC (high).

The existing senior notes (the notes issued and outstanding prior to the privatization that remain following the deal’s closing) carry no subsidiary guarantee and are therefore effectively structurally subordinate to the newly issued notes. Additionally, the security agreement related to the senior secured notes has been specifically crafted so as to not trip the negative pledge contained in the indenture that governs these notes. As a result, the existing senior notes are effectively junior to the new senior notes. However, DBRS has assigned identical recovery ratings to these debt issues given that the expected outlook for recovery is zero for both under each scenario considered. Therefore, DBRS has assigned a recovery rating of RR6 to these notes given their poor recovery prospects (i.e., 0%) and notched the instrument rating down two notches from the Issuer Rating to CCC (high).

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