Kirch on the brink after 'default' on key bonds

The debt-laden German media group Kirch was plunged further into crisis yesterday when a group of bondholders in a subsidiary demanded their money back.

ProSiebenSat.1 Media AG, a listed free-to-air broadcaster in Germany in which Kirch has a 52 per cent stake, was told that it was in default of the terms of €400m (£245m) worth of bond debt.

This is because ProSieben plans to merge with KirchMedia, the rights business of Kirch, a move the bondholders said was prohibited under the terms of the money they lent to ProSieben.

If ProSieben is declared to be in default, it could have a knock-on effect on Kirch itself, as the broadcaster is considered to be a subsidiary.

Under the terms of loans to Kirch, a "cross-default" at one of its subsidiaries is likely to be deemed to be a default by the whole group and its entire €5bn (£3.1bn) of debt would be called in.

That could allow Rupert Murdoch and other media magnates now eyeing Kirch's assets to move in.

The bondholders fear that Kirch will offload much of its debt on to the new merged entity and the rating agencies have already warned that, as things stand, the KirchMedia-ProSieben combination would be given a junk rating.

Kirch has said the merger is key to the restructuring of the group and that it must go ahead this summer.

David Staples, an analyst at Fitch, said: "This puts Kirch in a very awkward situation and is one further complication to the merger."

The furious bondholders have hired Norton Rose, the City law firm, to represent them. They have been trying to meet with ProSieben since September, when the KirchMedia deal was announced, but have been rebuffed.

Now they will go straight to the trustee of the bond issue and demand that ProSieben be declared in default. They want the merger to be called off or get their money back.

Christian Parker, partner at Norton Rose, said: "The merger would provide KirchMedia with a temporary credit lifeline but would seriously damage all creditors of ProSiebenSat.1. Without this merger bondholders believe that KirchMedia is likely to face a serious liquidity crisis and a possible insolvency."