NEW YORK (Dow Jones) -- A Texas district court judge sided with Clear Channel Communications Inc. and ruled Thursday that a group of six investment banks cannot walk away from funding the $19 billion private-equity buyout of the nation's largest radio-station owner.

Lenders including Citigroup (C), Morgan Stanley (MS), Deutsche Bank (DB), Credit Suisse (CS), Royal Bank of Scotland and Wachovia (WB) have declined to provide the financing that they once said they would issue, according to Clear Channel.

But the group of banks said Thursday that it will fight the ruling, as well as continue seeking to rework the deal. "We believe the suits are without merit and will contest them vigorously," Citigroup said in a statement, speaking for the group.

Clear Channel said Judge John Gabriel granted a temporary restraining order against the banks, which are demanding that the two private-equity firms buying the San Antonio-based broadcaster renegotiate the deal.

The company said Gabriel found that changing the financing would harm Clear Channel and interfere with the signed agreement.

The company has agreed to be purchased by Thomas H. Lee Partners and Bain Capital, in a deal valued at $39.20 a share. The deal comes with a breakup fee of between $500 million and $600 million, depending on the circumstances.

Shares of Clear Channel rose 10% after the news Thursday, following a 17% fall in the previous session as the deal seemed doomed.

Ruling for the home team

Texas, the home base for Clear Channel, is the second venue to host a lawsuit about the deal. Both Bain Capital and Thomas H. Lee have filed a suit similar to Clear Channel's in New York state court.

Judge Gabriel set an April 8 hearing on the matter.

However, Joel Greenberg, a New York attorney with Kaye Scholer LLP, said that the broader issues in the case will likely be decided in New York, where the deal was struck in the first place.

He added because the agreement was signed in New York and not Texas, the Empire State has jurisdiction to enforce any bank commitments.

The matter is "going to be an interesting fight," according to Greenberg, because the buyers aren't arguing that the banks are pulling funding, but merely putting unreasonable conditions on the existing commitments.

"The case in Texas is much more of a wrongful-action decision, which is a much harder case to prove," he said.

Lawrence A. Hamermesh, a professor of corporate law at Widener University School of Law in Delaware, suggested the banks could possibly ignore the Texas ruling altogether but probably would not.

"Most everybody would agree that the risk of this order sticking the banks is pretty low," he said, but acknowledged that "you don't toy lightly with a judge's ruling."

How able are the banks to get out of funding the deal precisely as they said they would is likely to depend on their commitment letter, which by all accounts is strictly worded.

"[Such papers] always have some wiggle room in them," said Greenberg, who has not reviewed the documents in the Clear Channel case but is familiar with similar deals.

But, he elaborated the agreement in this case -- which was put together before the recent credit crunch hit -- likely provides little opportunity for the banks to back out.

Such firm commitments virtually have disappeared as the credit markets seized up and lenders attempted to build as many hedges to risk as they could into legal agreements.

  (END) Dow Jones Newswires
  03-27-08 1513ET
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