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This week’s failed effort by Clear Channel’s financiers to engage the deal’s sponsors in arbitration was the result of direct pressure by Morgan Stanley and RBS, a source close to the situation told dealReporter.
The pair’s own clients were pressuring for commitment to the deal, said the source, adding he firmly believes they were also able to convince some of the other banks to follow suit. So while it was expected any of the six banks would attempt to save face before clients and reiterate their own commitment to the deal, betraying Citigroup wasn’t something they wanted to do, the banking source commented. At that point, it was not clear what MS or RBS had to gain in not following Citigroup into the legal pursuit, he added.
But this is not the first time the syndicate has seen dissension among its ranks; it was widely reported months ago that some banks were planning to unload CCU debt solo at bargain prices before they were corralled back in by lead-arranger Citigroup. However, it’s evident the bank’s olive branch was all for naught as the sponsors tersely rejected the arbitration calling it “disingenuous,” as per statements in media reports.
According to an industry lawyer closely following the situation, the arbitration offer left little incentive for the sponsors: “It [was] a clever PR move by the banks, possibly their first in this process,” he said. But from the sponsor’s perspective, he said it would not have been a good bet because their position was likely that items on the issues grid should not have even been there in the first place i.e. the terms or interest rate. “Those things are not subject to negotiation; they’re spelled out with crispness and clarity in the commitment letters. To throw that into a melting pot of arbitration and see what the arbitrator spits out is “all win” for the banks and “all lose” for the sponsors,” he commented.
But according to the source close to situation, refusal to enter into arbitration could add to the bank’s assertion that the sponsors were being difficult and not negotiating in good faith.
The lawyer said it would be interesting to get Clear Channel’s reaction to the week’s event. While it is necessarily a great argument, he speculated the company could say “Hey, these guys are now committing to fund. Under [the sponsor’s] reasonable best efforts covenant to get the financing, I want [them] to go to arbitration because then at least we’re going to get the money.” In response, the sponsors would probably say that would be unreasonable as the subject of the arbitration is a fundamental change of their commitment letter terms, he said.
The company has not responded to the arbitration invitation. However, a person briefed on the situation claims that Clear Channel supports the sponsor’s decision to resist arbitration.
The banks must now refocus on sizing up their worst case scenarios in New York and Texas courtrooms. They realize the sponsor’s case in New York is not as strong as compared to Texas, said the source, adding “but it’s not much better.”
While no one can predict what Judge Freedman will deliver, the majority of the bank camp does not see any more harm in seeing the case to judgment in New York, the source mentioned.
Potential damages have been calculated and re-calculated by the banks; figures vary from USD 600m to USD 10bn and higher, the banking source said. If the cost of alternative financing is ordered, it would not be too far from the original financing commitment, he commented. “That’s our worst case scenario…No matter how you look at it, [the banks] will have to pay more in total,” he said.
USD 500 - 600m is the figure allotted for damages in New York, concurred the person briefed on the situation adding “the sky is the limit in Texas.” The sponsors have not put a figure on what they think is just compensation yet, because they want to close the deal they do not want to go to settlement, this person said.
But the lawyer said it’s not entirely clear how damages would be calculated, especially as New York is “not a very good state” in terms of broad damages. As a matter of common sense, one would think the sponsors are entitled to reimbursement of the break fee, any cost incurred in trying to get the deal done, and possibly litigation fees, he said. However, lost profits or anticipated benefits of the deal would not be reimbursed based on the way direct damages work in New York and the bank’s own disclaimers, he added.
The person briefed on the situation thought that the lost profits that sponsors Bain and THL estimate they would lose from not closing the Clear Channel deal and growing it for over the next seven years could also be part of the compensation package that they would receive.
The New York judge will probably try to make a decision before a Texas decision, speculated the lawyer, meaning that things such as remedies could be decided by the NY judge first. While it would leave open the tortious interference claim for Texas, it could possibly close off things like specific performance, he said. If a New York opinion comes first, a Texas judge would have some difficulty ignoring the prior decision on the terms of the commitment letters, the lawyer surmised.
The person briefed on the situation says the sponsors plan to keep fighting this out via the court system; their hope is that the banks will back down and give the sponsors the original financing on the deal, she said.
Today, at a summary judgment hearing in New York, Judge Helen Freedman reserved an immediate decision on the banks’ suit withdrawal request, according to media reports. She also reportedly noted the possibility of extending the start date of a trial past 5 May by a few days.
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