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Updated: PE Firms Sue Banks To Save Clear Channel Deal; Clear Channel Wants Huge Penalty

Looks like the banks financing the Clear Channel (NYSE: CCU) sale definitely want to walk. Last night reports emerged that the deal was on the rocks, and now the two PE firms, Thomas H. Lee and Bain Capital Partners, have filed suit to save the deal. WSJ reports that the firms have filed suit in two locations Bexar County, Texas and the New York State Supreme Court, claiming that the financing banks did not negotiate in good faith, and attempted to insert “poison provisions” in the agreement. Details on those provisions were not reported. Why do the banks — Citigroup, Morgan Stanley, Credit Suisse, The Royal Bank of Scotland, Deutsche Bank and Wachovia — want out so bad? A report from Bloomberg today suggested that the banks stand to lose about $3 billion the moment the deal goes through, based on current trading of similar debt. Shares of Clear Channel tumbled 17 percent in today’s action.

From the release, which is now out: “‘We are disappointed and dismayed that the banks have chosen not to fund the transaction under the terms of the binding commitments they entered into almost a year ago. It seems clear that lenders’ remorse set in when credit markets worsened. Now they are trying to walk away from their commitment letter which clearly states that they bear all the risk that conditions in the debt markets might change. The banks are attempting to do so by changing the deal in ways no responsible purchaser could ever accept — replacing an extended, long-term financing package of at least 6 years that they