Charter Reveals 'Cosmos' Plan
Banks Object To One Part Of Operator's Reorganization
by Mike Farrell -- Multichannel News, 7/27/2009 2:00:00 AM
Charter Communications, in an apparent effort to stave off bankruptcy last year, attempted to monetize its net operating loss carry-forwards in an effort dubbed “Project Cosmos,” company CEO Neil Smit said in bankruptcy court last week.
Charter filed for Chapter 11 bankruptcy protection on March 27, a prepackaged filing that would reduce its debt by about $8 billion and pump another $3 billion in new equity into the reorganized company. Charter had hoped it would emerge from bankruptcy protection by the end of the summer.
While Charter's major bondholders have already signed off on the reorganization, its banks are objecting to one part of the restructuring — moving its current bank loan agreements over to the newly capitalized company. The banks, including JP Morgan Chase, have objected to the transfer of the loans, claiming that Charter has violated its loan agreements. The banks want to renegotiate the loan terms — most likely at a higher interest rate — with the new Charter entity.
In hearings last week at U.S. Bankruptcy Court for the Southern District of New York to approve Charter's reorganization plan, Smit revealed the plan to monetize the NOLs, according to Reuters, holding talks with Comcast and Time Warner Cable about a possible deal that never came to fruition.
Charter declined further comment.
NOLs are valuable in that they can help offset future taxable gains. Charter's NOLs expire between 2009 and 2028, according to Securities and Exchange Commission filings.
While Smit did not reveal how Charter planned to monetize the NOLs — which amounted to about $8.8 billion as of March 31 — one analyst believes it likely involved swapping certain cable assets.
Miller Tabak media analyst David Joyce said that one way to monetize NOLs without selling the entire company is to attach some of the carryforwards to specific assets.
“Conceptually, they would have to attach some of the NOLs to assets and then they would have to swap assets or cable systems,” Joyce said. “It's along the lines of some of the things that Liberty Media and [chairman] John Malone like to do with cash-rich swaps.”
Liberty has employed the cash-rich swap concept in several deals, including its acquisition of a controlling interest in DirecTV Group in 2006.
Joyce added that Charter has several assets that were likely attractive to Comcast and Time Warner — especially its Southern California and New England systems. Southern California, with about 376,000 customers, has long been considered to be a good fit with Time Warner, which has about 1.1 million customers in Los Angeles. New England, with about 336,000 subscribers, has long been considered a fit with Comcast.
Charter's NOLs — basically, its accumulated losses that can be used to offset tax payments in the future — have been one of its key assets over the years. Back in 2007, after chairman Paul Allen mulled whether to take the company private, Charter had to create a “poison pill” shareholder-rights program to protect the NOLs. If Allen had taken the company private, it could have constituted a change of control, which would have erased the NOLs.
Ironically, if Charter's latest reorganization plan is approved, the NOLs won't survive either. According to Charter last 10-Q quarterly statement, filed with the SEC on May 7, the reorganization will be in effect a change in control — Allen will possess 38% of the voting stock but the rest will be split among bondholders — “resulting in a material limitation on our future ability to use a substantial amount of our existing net operating loss carry-forwards.”
CHARTER CLUSTERS
Charter has about 5.01 million video customers in its franchise territories. Its two main operating groups and the number of subscribers in the key market areas within those divisions:
| East Operating Group: | Subscribers |
| SOURCE: Charter Communications. |
|
| Central States | 543,200 |
| New England | 336,800 |
| Louisiana/Tennessee | 533,400 |
| Alabama/Georgia | 609,100 |
| N. Carolina/S. Carolina/ Virginia | 516,400 |
| Total East | 2,538,900 |
| West Operating Group: | Subscribers |
| Northwest | 248,500 |
| Sierra Nevada | 278,300 |
| Southern California | 376,800 |
| Minnesota/Nebraska | 312,200 |
| Wisconsin | 507,500 |
| Michigan | 592,200 |
| Texas | 159,300 |
| Total West | 2,474,800 |
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