Clear Channel 9% 2019 bonds are an attractive risk-reward at 102 Good coupon, high current yield, and good asset coverage, with a call price of 104.5 in 2016, these bonds could rally to 108/109, which would be a ~ 15% unlevered return. On the downside, the bonds could trade down in a bearish market to the low 90's, so you give up the annual coupon, but the overall return on the position is flat to slightly negative.

Clear Channel was acquired by Bain Capital and TH Lee at the top of the LBO market in 2007 for $24bn (~12x LTM EBITDA). The business is comprised of two units: Outdoor Advertising and Radio Broadcasting, of which CCMO is the industry leader in both categories. This is a classic "good business", "bad balance sheet" situation. The top of the capital structure offers investors opportunities to earn good returns while offering downside protection given the robust unlevered cash flows of the business. It remains to be seen whether the sponsors will be able to grow the business into its capital structure and create equity value, but I feel comfortable that there is a lot of equity value through the bank debt and priority guarantee notes (including the 9% of 2019s).

The maturity stack in 2016 is still quite hefty, even with all the refinancings the company has accomplished over the past 2+ years. There is roughly $8bn of bank debt and $1.3bn of bonds that come due in 2016, and the company has been slowly extending maturities while attempting to manage interest costs. Leverage thru the priority guarantee notes is approximately 8x (including debt at the Outdoor subsidiary). Adjusting for the equity value of the Outdoor subsidiary, we believe holders of the bank debt and PGNs are creating the radio business at an unlevered FCF yield of ~12%, which compares quite favorably to its public radio peers, which trade around 10% unlevered FCF yields. Hence, in a restructuring scenario (which may come in early 2016), we believe the notes are covered at par. If we collect 9 pts per year for the next three years, our basis in the 9% of 2019s would be roughly 75%, providing a large margin for error on our estimates and still make a nice profit.

On the upside, the notes could trade well above the call price of 104.5 given the call date is not until July 2015. Yield to worst does not drop below 7% until a price of 108. At 109, the yield to worst is still 6.5%. The notes trading to 109 would result in a 15% total return (assuming it takes one year to trade there).

The catalysts for the bonds to trade to 109 are two-fold: First, extending the bonds that mature in 2016 just behind the bank debt, which would create more runway for the company to address the $8bn of remaining bank debt that matures in 2016. A refinancing of the 2016 bank debt would allow the markets to feel comfortable that the 9% bonds will continue to collect coupon and that the company has more time to grow into its over-levered balance sheet. Second, the company exhibiting real growth in EBITDA would push the entire cap structure upwards. While the macro picture has been sluggish, the company has started to make real in-roads with advertisers as it promotes the company has a unique national platform to reach consumers. The management team has been laser-focused on taking market share from other forms of media, such as newspapers and TV, and any positive results from these efforts would generate a substantial amount of equity value, given the operating leverage in the businesses.