Clear Channel deal in trouble; banks fear loss

The $20-billion leveraged buyout of U.S. radio operator Clear Channel Communications Inc. was in jeopardy Tuesday, with banks increasingly reluctant to provide financing, a source familiar with the situation said.

The banks appear unwilling to account for any losses on the loans they agreed to make for the deal, the source said. But the final resolution is unclear, with the private equity buyers still wanting to do a deal, the source added.

If the Clear Channel deal falls apart, it will be the latest in a series of leveraged buyouts that have failed since the credit crisis began last year.

Clear Channel struck a deal last year to be bought by private equity firms Thomas H. Lee Partners and Bain Capital Partners for $39.20 a share.

Shares of Clear Channel plunged 21% in after-hours trading Tuesday.

The company’s stock fell $1.89 to $32.56 in the regular session.

Banks that agreed to finance the deal include Citigroup Inc., Morgan Stanley, Deutsche Bank and Credit Suisse Group.

Danielle Romero-Apsilos, a spokeswoman for Citigroup, declined to comment. Representatives of Credit Suisse, Deutsche Bank, Morgan Stanley and Wachovia Corp referred questions to Citigroup. Royal Bank of Scotland Group did not immediately comment.

A spokeswoman for Clear Channel said the company had no immediate comment.

Banks have to record decreases in the market value of loans in their income statements in a process known as “marking to market.”

Any declines in the market value of these loans could cut into bank earnings and, in the worst case scenario, cut into capital levels.

Banks are increasingly reluctant to take on credit risk because their balance sheets are strained by sub-prime mortgages, collateralized debt obligations and other forms of debt that are performing much worse than expected.