Clear Channel's perturbed buyout deal, threatened by deteriorating credit conditions, brings to question the crucial role banks are playing in the $19.4 billion deal.

Thomas H Lee Partners and Bain Capital, the private equity groups spearheading the takeover, sued the banks on Wednesday, saying they balked at their obligations to fund the buyout.

The pair, which is looking to buy the largest radio and billboard company in the U.S., would be forced to pay penalties up to $600 million if the deal is not completed by June of this year.

According to a lawsuit, the banks, which include Citigroup and Morgan Stanley, have a case of lenders' remorse as credit markets have worsened, but have no legal ground to go back out on their commitments, the pair claims.

When they signed the Commitment Letter (as well as prior iterations of that agreement in November 2006 and April 2007), the Banks agreed to assume the risk that market conditions might change over time, the suit reads.

In late 2006, THL Partners and Bain turned to banks to help fund its leveraged buyout [LBO] of Clear Channel.

LBOs are typically acquisitions which allow companies to make big purchases without investing a large percentage of the capital themselves. Instead, banks receive the assets of the company being purchased, and repackage those loans into securities investors could purchase.

Since the credit market meltdown which started in the summer of 2007, however, banks have been less willing to provide easier credit terms to borrowers. A steep downturn in the housing market and a slumping U.S. housing market has lead to less risky lending.

Despite the recent market turmoil, Clear Channel remains a desirable acquisition candidate, outperforming a relatively weak radio industry, according to David Joyce, a Miller Tabak analyst.

Talks were accelerated on Thursday as parties from Clear Channel and the private equity groups met, however the company's SEC filing reveals that the banks did not show up, and the pending deal may collapse.

The company continues to be ready, willing and able to consummate the merger under the merger agreement, which remains in effect, Clear Channel stated. The company is unable, however, to estimate a closing date at this time and cautions the markets that a closing may not occur, it added.