(Recasts lede. Updates with context starting in second paragraph, Citigroup comment in eighth paragraph, lawyer comment in ninth paragraph. Updates premarket quote.)

DOW JONES NEWSWIRES

Clear Channel Communications Inc. (CCU) was granted a temporary restraining order late Wednesday against a number of banks to force them to follow through with funding its $19.4 billion buyout with two private-equity firms.

The move, which sent shares rallying in premarket trading, represented a positive sign for Clear Channel after speculation began swirling earlier this week that the deal would fall through as the private-equity firms and banks backing the transaction reportedly failed to resolve their differences over final financing terms.

The order compels the banks to issue buyout financing immediately, though it is expected the banks will object to the terms. Two private-equity firms would acquire Clear Channel for $19.4 billion and take on $7.8 billion of its debt.

"We are pleased that the banks and the purchasers will now be able to move quickly to complete the loan documents and fund the merger," Clear Channel said.

Shares of Clear Channel recently rose 11% in the premarket to $30.01; however, that's still well below the deal's price of $39.20.

The order came hours after private-equity firms Thomas H. Lee Partners LP and Bain Capital Partners LLC filed two suits Wednesday alleging that the banks - Citigroup Inc. (C), Morgan Stanley (MS), Credit Suisse Group (CS), Royal Bank of Scotland Group PLC (RBS), Deutsche Bank AG (DB) and Wachovia Corp. (WB) - illegally balked at their obligation to fund the deal.

One of the suits, filed in New York, alleges breach of contract and fraud. The other - filed in Texas and joined by Clear Channel - claimed the banks improperly interfered with the merger agreement and asks that they be awarded more than $26 billion in damages. The Texas suit prompted the restraining order to be issued Wednesday night when Presiding District Court Judge John D. Gabriel found in favor of the firms' and Clear Channel's claim that "irreparable harm would result" if the merger was interfered with.

Speaking for the banks, Citigroup said late Wednesday before the order was announced that the group "has been and remains prepared to honor the obligations as set forth" and will fight any Clear Channel-related suits. Citigroup said Thursday that on behalf of the group, it is declining to comment on the temporary restraining order.

Lawrence A. Hamermesh, a lawyer of corporate law at Widener University School of Law in Delaware, said it is unusual for a judge to issue such a restraining order without a hearing first to discuss the case. He said the banks could ask the Texas judge to set aside the order until a hearing is held.

The dispute is the latest instance of a major Wall Street deal that has landed in the courts in the wake of the credit crisis, after speculation began swirling Tuesday that the deal might fall through.

The deal is typical of many made during the buyout boom of recent years, as private-equity firms loaded up the companies they bought with debt - in the form of bank loans and bonds - to finance their purchases. But the credit crunch has dried up the market for those loans, leaving some banks that arranged financing for buyout deals stuck with them. Some completed buyout deals already are struggling under heavy debt loads, and there's been a dearth of new transactions.

Once considered taboo, walking away from agreed-to buyouts, and then ending up in court, has become increasingly popular during the credit crunch.

In January, SLM Corp. (SLM), the student lender known as Sallie Mae, settled a legal feud over its failed $25 billion leveraged buyout by J.C. Flowers & Co. The private-equity firm backed out of the deal it had agreed to last April under the pressure of a souring credit market and tougher legislation that hurt margins in Sallie Mae's key federally guaranteed student-loan business, marking the largest deal to fail after the credit crunch ended a record wave of buyouts.

In December, a Delaware chancery court ruled against United Rentals Inc.'s ( URI) petition to force Cerberus Capital Management LP to close a $4 billion buyout of the construction-equipment-rental company after the private-equity firm in November pulled out of the deal it had agreed to four months earlier.

And earlier this month, Genesco Inc. (GCO) agreed to receive $175 million in cash and 6.5 million Finish Line Inc. (FINL) shares in a settlement after UBS AG (UBS) argued, and Finish Line concurred, that a combined Genesco and Finish Line wouldn't be able to bear the heavy debt burden to finance the merger and would be insolvent from the get-go.

In Clear Channel's case, the buyout firms already have collected about $4 billion from their investors for the equity portion of the deal - the money they themselves are putting down. The banks committed to lend as much as $22 billion to fund the deal, $18 billion of it as senior secured loans. They have the most to lose if the deal goes ahead. The continuing crisis in the market for leveraged debt means they would have to mark down the value of their Clear Channel loans as soon as the deal closes and book the losses.

Such debt typically has been marked down 15%, meaning the banks could lose $ 2.7 billion the moment they close the deal. Still, the commitment letters the banks signed when the deal was cut in May make it almost impossible for them to back out of their commitments.

The Clear Channel deal is just one of many banks agreed to finance back when credit was cheap and markets were eager to take risk off banks' hands. Banks already have recognized more than $9 billion in losses on leveraged loans, and Oppenheimer analyst Meredith Whitney said Thursday they are likely to take another $6 billion hit when they report first-quarter results next month.

Of the banks in the Clear Channel consortium, Whitney expects Citigroup to book $2.15 billion in losses from leveraged loans in the first quarter and Wachovia to book $455 million worth.

Including Clear Channel, banks still have some $120 billion in loans in the pipeline from the LBO boom, according to Fitch; some $150 billion to $200 billion are "hung," or sitting on bank's books. The value of such loans may fall further, and many are unhedged, Whitney wrote Thursday.

-By Donna Kardos, Dow Jones Newswires; 201-938-5963; donna.kardos@ dowjones.com;

(Matthew Karnitschnig, Heidi N. Moore and Sarah McBride of The Wall Street Journal and Shira Ovide of Dow Jones Newswires contributed to this story)

  (END) Dow Jones Newswires
  03-27-08 0934ET
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