Evaluating Financing Terms of a Failed Buyout
Advisory Services
The Situation
Clear Channel had planned to conduct a leveraged, management-supported buyout. Before the buyout was completed, there was a breakdown in negotiations with the consortium of lenders who were to arrange financing for the deal. There had been an initial letter of agreement between the buyers and the lenders, but the details of the financing package still needed to be finalized. The buyers sued the consortium of lenders, alleging that the lenders had made unreasonable demands during the negotiations in an attempt to scuttle a deal that had become less attractive to the lenders as credit market conditions worsened.
NERA's Role
NERA was retained by the lenders to estimate damages if the buyers' allegations were found to be correct. The NERA team calculated damages by estimating what it would have cost the buyers to comply with all of the allegedly unreasonable demands that the lenders had made during negotiations. This analysis required the construction of two discounted cash flow models, one each for the negotiating positions of the two sides. The disputed provisions were in connection with certain rollover provisions on bonds, restrictions on the use of Clear Channel's revolvers and financing provision in connection with a transfer arrangement with a partly owned subsidiary. Because of the nature of these disputed terms, the differences could not be evaluated simply by changing some parameters in the cash flow model. Instead, they required estimating a distribution of future possible interest rates at which refinancing could be arranged, taking into account possible changes in the credit quality of Clear Channel and its subsidiaries. This involved simulating credit rating transition matrices. The NERA team also conducted a solvency analysis, evaluating whether, as the buyers had alleged, the altered financing terms would have created a liquidity crisis for Clear Channel.
The Result
The parties settled on the second day of trial, completing the deal with no payment of damages.
