How Will The Cumulus Bankruptcy Play Out?

That’s the big question for about 6,000 people working for the company who’ve been asked to roll up their sleeves and have a business-as-usual approach to their working day. The bankruptcy filing announced by Cumulus executives last week could take up to 6 months – or longer – before a court approves the plan. Radio Ink spoke to Debtwire Legal Analyst Josh Friedman to get his expert opinion on how this bankruptcy might play out.

INK: Explain the type of bankruptcy this is.

JOSH FRIEDMAN: This is a prearranged bankruptcy not a prepackaged bankruptcy. A pre-packaged bankruptcy means you basically have agreements with your creditors in advance which you send out for votes, vote on the plan, and then come to the court and say we have a done deal signed, sealed, and delivered, let’s get it done as quickly as possible. There have been prepackaged bankruptcies that have been a week or less, this isn’t what is happening here. What is happening here is a what is colloquially known as a prearranged bankruptcy where the company has entered into a restructuring support agreement so they have a deal with a group of term loan lenders that own enough of the debt to control that class in the bankruptcy voting process. Also the parties who have signed on include equity owners, Crestview and the Dickeys. This is a deal between the company, the stock owners, and the term loan lenders. The reason it is not a prepackaged deal is because what they are trying to do is cram this deal down on the note holders. There is about $610 million outstanding of unsecured notes that are represented; generally speaking there is an ad hoc group of note holders advocating this group’s interest for certain holders of those notes for some time. Taking a step back, note holders had entered into a restructuring deal that was never completed, say about a year ago, where they are going to restructure the notes into different debt as opposed to what has happened now. This is a “cram down” prearranged plan. It is a cram down because they are taking the votes of the term loan lenders that are voting in favor of the plan and cramming it down the throats of the note holders.

INK: How do you see this playing out?
JOSH FRIEDMAN: There are two ways. If the note holders agree and think this is great they will vote in favor of the plan and the timeline; there are milestones which are baked into the restricting support agreement that a plan will be confirmed and go effective within, for example, 180 days. If this happens and no objections come this will be fairly fast. You still need to file a plan and disclosure statement and have to vote, and the votes have to come in and you have to have a number of hearings in front of the judge, one of which will be to see whether the plan can be approved and the term confirmed by the court. That it meets the bankruptcy code requirements for what is a reorganize plan. That can happen quickly. If the note holders disagree, what you would often have is they would fight the plan. They would object to it and the objection in situations such as this would be largely around the fact we think this company is worth more, you are trying to cram down a plan over us and you are favoring asserting constituency which are the term loan lenders over us and that’s not fair. You are undervaluing the company. Really, Cumulus is worth more than this and we should get a greater percentage of the equity. Right now, with the way the plan is working, is a deal the term loan lenders are getting 83.5% of the company while the noteholders are getting 16.5%. The note holders might not think that is enough and they might think that is undervaluing their securities and therefore they are entitled to a greater percentage of the company.

INK: In your experience, what’s going to the junior holders?
JOSH FRIEDMAN: Instinctively, being that they have been negotiating with them throughout this time, they would have them on board if they agreed with this precise iteration of the plan. They would’ve been able to do their version of a pre-pack plan if they agree. They are going to file this case and reach a deal with equity and reach a deal with the lenders, and the note holders agreed they would’ve signed up from Day 1. So by the fact that they haven’t signed up yet, that signals that their position aligns more with the lender’s position and therefore it would not be surprising to see the noteholder group say we should get a greater percentage of equity down the line.

INK: Is this worth their fighting?
JOSH FRIEDMAN: Generally speaking, it can be the downside isn’t overly significant, usually. The downside is your professional fees. If you are a large group of noteholders that have been negotiating over this time, you have invested a certain amount into your securities to buy the bonds, you have hired advisors that have been advising you over this time and you have been paying them. You now are at this stage you presumably would back them to fight the plan and try to get more equity. There is one other way they can fight it which is an unsecured creditors committee. In  a case such as this, the U.S. trustee will group together unsecured creditors and they can appoint an official committee of unsecured creditors that will represent the interest at large of the unsecured creditor base. The largest unsecured creditors are the unsecured notes — that is the largest claim by a long shot. There is $600+ million dollars of unsecured notes and the next largest claim against them is Neilson, at less than 10 million. If they wanted to influence the case, they could have noteholders or indentured trustees sit on the committee and try to advocate for unsecured creditors that way.

INK: What happens with Neilsen? Do they continue to provide ratings?
JOSH FRIEDMAN: When you are dealing with an unsecured creditor like that there are two ways to look at it, and they sort of tie together. One is the claim that is looking backwards what’s the amount they are owed, and in terms of the go-forward, presumably, they are going to want to continue that relationship. How does that relationship change if you are possibly Hosing a creditor. They will deal with those claims by agreeing to pay them while locking in the go-forward relationship. The way unsecured claims are being treated, basically, there is going to be a recovery pool that they are going to be entitled to receive from and unsecured claims get a percentage of that recovery. There is sort of a bucket set aside for them. It depends on what the go-forward relationship is going to be and whether the company deals directly with them or other key creditors to have them continue to provide those services going forward.

INK: What happens to all the people that have invested and bought stock?
JOSH FRIEDMAN: Stock under this plan is going to get wiped out and receive zero. Cancel the interest and receive no distributions. That is what this plan provides.

INK: Looking at your crystal ball, knowing what you do about this bankruptcy filing, the company said in the WSJ that May is when they want to wrap this up. What do you predict?
JOSH FRIEDMAN: You could comfortably say May is an exit date because that is what they have built in. As I mentioned before, these milestones where when you enter in with these prearranged cases, the way to do it is through a restructuring support agreement. You literally sign a contract, the key parties, so the company, the equity holder, Crestview, and the lender group have signed this agreement that locks in the terms of this deal. The breakdown between the equity division, what the recoveries are going to be, and in that they build these milestones which are certain things that have to happen by a certain time, deadlines. When does a plan and disclosure statement get filed, when is the confirmation order going to be entered. So they have built in the end of May as the time by which this case will be done with. By the end of May, that is the “drop dead” deadline for when this case should be over. Technically, this is subject to the parties agreeing to extend these deadlines  if there is reason, but that would be if you had to prognosticate and say when is this going to exit, it would be before this date.