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Bain, Lee Said to Break Even on Investment in Bankrupt IHeart

Bain, Lee Said to Break Even on Investment in Bankrupt IHeart

(Bloomberg) -- IHeartMedia Inc. has gone bust, but that doesn’t mean the two private equity firms that bought the broadcaster during the past decade’s mega-buyout spree got wiped out.

They’ll almost break even, because of iHeart debt they bought at deep discounts and millions of dollars in management fees, according to people familiar with the matter. And the two firms, Bain Capital and Thomas H. Lee Partners, might gain even more from parts of the company that they’ll get to keep after it filed for Chapter 11 protection on Wednesday.

Bain Capital and Thomas H. Lee Partners teamed up in 2008 to buy Clear Channel Communications, as iHeart was then known, for about $24 billion. They invested about $2 billion of equity for a combined 72 percent stake.

The firms scored much of the return on cash interest they garnered on about $2.5 billion face-value of iHeart loans and notes that they bought as the broadcaster’s income tanked, the people said. They have since unloaded much of that debt, according to the people, who asked not to be identified as the details aren’t public.

All told, Bain and Lee wagered as much as an additional $900 million on the debt, one of the people said. They financed their debt stakes with borrowings, pocketing the difference between their financing cost and the high effective interest rate on their debt. Until Feb. 1, iHeart hadn’t missed an interest payment.

Ownership Interest

Through their current debt stakes, the buyout firms will retain about a 10 percent ownership interest in iHeart and receive a significant stake in the company’s billboard advertising unit, Clear Channel Outdoor Holdings Inc., the people said. Bain, led by Co-Managing Partners John Connaughton and Jonathan Lavine, and Lee, led by Co-Presidents Tony DiNovi and Scott Sperling, still hold about $1.2 billion of iHeart senior debt.

Under the restructuring plan, which still needs approval from the court and from some holdout creditors, senior creditors will be awarded 94 percent of iHeart’s equity and full ownership of Clear Channel Outdoor. Common shareholders will keep just 1 percent.

The company paid the private equity firms $252 million in advisory fees and reimbursed costs from 2008 through September 2017, according to company filings.

Representatives for Bain and Lee, which are both based in Boston, declined to comment.

Toys ‘‘R’’ Us

IHeart is Bain’s second major buyout to go bankrupt in recent months. Toys “R” Us, the toy retailer that Bain bought for $7.5 billion with KKR & Co. and Vornado Realty Trust in 2005, went under in September. The collapse wiped out a $1.3 billion equity investment by the three.

Toys disclosed this week that it would wind down U.S. operations after efforts to salvage the business failed.

IHeart was one of 19 companies that buyout firms including Bain and Lee acquired for more than $10 billion each during a takeover frenzy fueled by cheap debt from 2005 to 2008. The outcome of these deals has been mixed.

The biggest and worst, the $48 billion purchase of Texas utility Energy Future Holdings Corp., erased an $8.3 billion equity investment led by KKR, TPG and Goldman Sachs Capital Partners. A handful of massive deals -- notably KKR and Bain’s purchase of hospital operator HCA Inc. and Blackstone Group LP’s of hotel chain Hilton Worldwide Holdings Inc. and of Equity Office Properties Trust -- weathered the post-2008 financial meltdown and went on to produce hefty gains.

Most of the 19 deals delivered modest positive returns, which fell short of those of public stock indexes.

By snapping up iHeart’s debt, Bain and Lee seized on a maneuver that Apollo Global Management LLC, a private equity rival, employed with varying degrees of success to shore up foundering bets after the financial crisis.

In the case of real estate broker Realogy Holdings Corp., Apollo wielded the technique to turn a potential $900 million loss into a more than $1 billion profit.

--With assistance from Emma Orr

To contact the reporter on this story: David Carey in New York at dcarey13@bloomberg.net.

To contact the editors responsible for this story: Elizabeth Fournier at efournier5@bloomberg.net, Rick Green

©2018 Bloomberg L.P.