The court case centers around the definition of an investment, which sounds fairly simple, but the outcome of the trial could impact other U.S. companies looking to restructure their debt as well as the buyers of their corporate bonds.
“The guidance for other corporations will turn on the how the final outcome impacts similar language for companies and their bondholders,” said Jacob Frenkel, chair for the government investigations and securities enforcement practice at Dickinson Wright law firm in Washington, D.C. “How the court rules will be noticed.”
According to the Express-News, if state District Judge Cathleen Stryker rules against iHeartMedia, it could kick off a cascade of events that could quickly trigger technical default on as much as $15 billion of its bonds and put iHeartMedia at risk of bankruptcy, company executives have said in court. The two sides tried to no avail to find a compromise before the trial, but may still be able to strike a deal that allows iHeartMedia to avoid bankruptcy if it loses in court.
The San Antonio media conglomerate has been fighting a group of its bondholders since early January, when investors began threatening to force the company into default on some of its notes over a transaction they claim technically violated their bond agreements.
At issue is whether iHeartMedia’s Dec. 3 transfer of 100 million shares of company-owned stock from one subsidiary to another qualified as an investment. The transaction was done as part of a complicated strategy to reduce iHeartMedia’s financing costs on its staggering $20.8 billion in debt.
On Monday, iHeartMedia lawyer Kevin Huff told Stryker in San Antonio that the transfer was proper because it fits the definition of “investment” in its debt agreements.
“Investment has meaning beyond a profit motive. This was a permitted investment,” Huff said in court this week, because the company wanted to issue new debt secured by the transferred shares to buy back older, expiring debt trading at a discounted value. That would reduce company debt and interest expense, Huff said.
“When a company can save money, profits go up. So there is a profit motive,” Huff said.
IHeartMedia performed similar transactions in 2008 and 2009 by moving cash into subsidiaries designed to buy company debt at a discount. “No one threatened notices of default then,” Huff said. The “investment” definition used by iHeartMedia for the bonds under dispute are common, he added. “If iHeart is in default, then many, many companies would find themselves in default,” Huff said.
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