A Curious Snag In Debt-For-Equity Restructurings As Goldman And JPM Do A Stealthy Roll Up Of The Media Industry

While most hedge funds traditionally have an on-shore and an off-shore investment vehicle, the bulk of investable capital is allocated to accounts domiciled in the Caymans, Bahamas, Isle of Man, or some other tax "friendly" country, as LPs are never too crazy about that little snag known as taxes, and offshoring provides some nice and useful alternatives to said snag. Distressed hedge funds, those that acquire either secured or unsecured debt with the hope of equitization, are no exception. Yet equitization by essentially foreign vehicles is starting to get some dirty looks by regulators, which limit "foreign" equity investments in traditionally American companies and sectors. Some developments in the upcoming restructurings of media companies may put a new wrinkle on what is promptly becoming the most prevalent and profitable means for hedge funds to invest capital (not by necessity but for the simple reason that if a sector is not too big to fail, it is likely failing massively). The case of Citadel Broadcasting, which Zero Hedge discussed recently as commentary highlighting the lunacy of the current investment climate, is just such an example.

According to the Wall Street Journal:

Wall Street lenders are tripping over federal media-ownership rules as they find themselves the unexpected owners of several distressed radio, television and newspaper companies.

The issue has taken center stage at Citadel Broadcasting Corp., as one of the U.S.'s largest radio broadcasters races to revamp its balance sheet. Citadel has offered senior lenders owed $2 billion -- including J.P. Morgan Chase & Co., General Electric Co.'s GE Capital and ING Groep NV -- a deal that would exchange a big chunk of debt for equity, people familiar with the negotiations said.

On Wednesday, Citadel faced a deadline to make a $2 million interest payment, but its status remained unclear. Talks have slowed in recent days in part because some lenders have been caught off-guard by Federal Communications Commission rules designed to limit concentrated holdings of media firms, said people familiar with the matter.

For big banks and hedge funds holding debt in everything from radio and television stations to newspapers, FCC rules have made restructurings more complex. The FCC must approve media sales and has specific rules that limit ownership of multiple media outlets in individual markets, even when such shareholder stakes are small.

The calculus can be even more difficult for hedge funds, some of which are registered offshore. The FCC caps foreign ownership at 20% of a U.S. broadcaster -- 25% if the stake is through a holding company -- which can change how new ownership stakes are structured.

And lest someone think that this yet another shady space of the corporate finance world may be one that has somehow avoided the tentacles of the squid, think again:

J.P. Morgan and Goldman Sachs Group Inc. are also among radio stations' leading lenders.

Goldman Sachs and other lenders just swapped debt for 85% of Nassau Broadcasting Partners LP's equity. Nassau operates 51 radio stations along the East Coast. Nassau had to put its Cape Cod, Mass., stations into a separate company, because Goldman has another radio investment in Cape Cod and didn't want its stake to cause a conflict with the FCC.

Throw companies like Tribune into the mix where JP Morgan will allegedly end up with an majority equity stake, and one wonders why Goldman and JPM were so eager to provide "rescue" financings to virtually the entire distressed media space: both companies knew too well that sooner or later they would end up with full equity control over essentially the most coveted industry: thousands of TV stations, radio channels, newspaper and magazines. If you thought the media propaganda was unbearable now, just wait. Nonetheless, one doubts that much will be made by the FCC of JP Morgan's or Goldman Sachs' stealthily encroaching control of the entire media world. After all, they already pretty much already control the airwaves. This way their domination of the 4th estate and the idiot tube will soon be complete.

As for traditional hedge funds who think they are on equal footing with the big boys, they may be in for a surprise.

At ION Media Networks Inc., lenders are poised to get ownership of the television company while doing away with some $2.7 billion in debt and other obligations. ION's lenders include investment firms Avenue Capital, Black Diamond, Canyon and Trilogy Portfolio Co.

Alas, all these funds operate primarily out of their offshore accounts. So while they just now start the long, hard process of convincing the FCC they have nothing but the best P&L intentions, Goldman and JPM, or better known as the Treasury and the Fed, will have long cemented their controlling stakes in a streamlined, deleveraged media industry.

Of course, as any assertions that select financial organizations seek to control the media usually are met with counter allegations of the "tin-foil" hat wearing variety, Zero Hedge will, over the coming week, demonstrate in which media companies Goldman and JP Morgan currently are the key fulcrum security holders, and where they will soon have equity-stake dominance, read: full freedom to dictate what, who and why, when and where appears in print or on the airwaves. We will also provide a breakdown of just how many TV station affiliates, radio and cell phone towers, newspapers, magazine, pamphlets and blogs will shortly be under the full equity control of the two Wall Street firms.